The times are changing, and changing fast. The few
years have witnessed a high increase in students aspiring
for MBA and professional courses. The number of colleges
offering these courses is also on the rise. With fees
of these courses skyrocketing, students are queuing
for educational loans from banks. Gone are the days
when one had to run from pillar to post to borrow
money to study. Now a variety of Instruments are available
for pursuing higher studies.
Almost all nationalised banks offer
educational loans to students for studies in India
and abroad. Besides some private trusts are running
study loan scheme, the terms and conditions of which
vary from organisation to organisation. To garner
students to avail educational loan nationalised and
private banks have even started putting their posters
in college campus and promote their schemes. This
trend is catching on and one will see lot of students
going in for educational loan once the awareness level
increases.
Let us look at Banks Educational
loans for funding your Post Graduation courses in
India.
POINTS
TO REMEMBER BEFORE APPLYING FOR A LOAN
The
tenure
A longer repayment tenure would mean more interest
payments on your loan. Before you set out to complete
the paperwork for a loan calculate the Equated Monthly
Installments (EMI) to know how much you are expected
to pay and whether you have the capacity to pay that
in time.
The
Loan Costs
Never forget the fee charged for disbursing a loan
to you. Some banks have a higher fees than others.
You need to take care of this important component
of loan disbursements.
The
Prepayment Dilemma
Many public sector banks do not charge you a penalty
for prepayment of loans whereas many private banks
ask for a penalty payment. Check this out upfront.
The
Fixed Interest Rate
You need to know well in advance that interest rates
do not fluctuate. If they fluctuate the choice is
yours. There are quite a few fixed interest rate loans
and if you are worried about variable interest rates
then the best option is to go for a fixed interest
rate to avoid suprises.
Monthly
or Annual Repayments?
You need to check out the repayment burden on yourself
and see if an annual payment suits you. If not then
go for the monthly plan.
Tax
exemption on loans
One can claim a deduction of up to Rs. 40,000 on the
amount paid out of the taxable income in the previous
year. This is a comprehensive limit, and includes
principal and interest, if any.
One can claim the deduction if you've taken a loan
from a financial institution or an approved charitable
institution to pursue full-time courses for graduate
or post-graduate level studies in engineering (including
architecture), medicine and management or a post-graduate
course in applied sciences or pure sciences, including
mathematics and statistics.
The deduction is allowed for the first assessment
year relevant to the previous year when the assessee
starts repaying the loan and for seven assessment
years immediately following thereafter. In other words,
the deduction is available for a maximum period of
eight years from the first year of repayment. The
deduction shall be allowed for the period of loan
and interest repayment, if it is repaid in full before
the end of the above period.
Note:
This deduction cannot be claimed by parents
who have taken loans for the higher education of their
children.
The
Relevant section/rule is Section 80E of the Income
Tax Act.
DOCUMENTATION
REQUIRED
Typically the following are the basic minimum documentation
to be provided to the bank while availing of loans
from them:
Mark
sheet of last qualifying examination for school and
graduate studies in India
Proof of admission to the course
Schedule of expenses for the course
Statement of Bank account for the last six months
of borrower Income
tax assessment order not more than 2 years old Brief
statement of assets and liabilities of borrower Identity
and give proof of residence. Copies
of letter confirming scholarship, etc. Copies
of foreign exchange permit, if applicable.
PROCESSING
TIME
Most bank claim to disburse the loan
money within one to two days after the required papers
are submitted to them. A checklist is provided to
the person seeking loan giving the details of the
required documents like proof of age, address, admission
expenses, assets and liabilities of co-obligants,
details of collateral security, certificate of last
qualifying examination etc.
However experienced loan-seekers
say getting loan from banks is an uphill task. There
are students who could get the loan, but after the
deadline for fee deposit had expired!
DOCUMENTATION
TERMINOLOGY
Adjustable
Rate Loan
Adjustable rate loan is one where the rate of interest
is linked to the Prime Lending Rate. It is also known
as "Floating Rate Loan". If you have opted
for adjustable rate loan, then you stand to gain if
interest rates drop. Likewise you need to be prepared
to take the risk when interest rate increase. Therefore,
in this case the gain/ loss of interest rates fluctuation
is borne by the borrower. The rate on loan is generally
revised on regular intervals.
Application
A form used to apply for a loan, on which you'll put
relevant information about yourself. Also refers to
the whole process of applying for a loan.
Appreciation
An increase in the value of a property due to changes
in market conditions, or for other reasons. The opposite
of depreciation.
Asset
Anything with a rupee value that you own. Your assets
are tallied up when the bank is trying to figure out
what it can afford to lend you. You don't have to
own something "free and clear" for it to
be considered an asset. Say you have a house, on which
you owe money to a bank or mortgage company. The amount
you owe is considered a liability; the amount you've
already paid off is an asset.
Bonafide
In good faith, real, not fraudulent.
Borrower
Classification
Lenders classify borrower based on their personal
and professional profile. Most common borrower classifications
are:
This is a facility by which the employer of the borrower
agrees to deduct the installment amount from his salary
and pay the same directly of the lender. In some cases
the lender imposes special lien on payment of borrower's
provident fund. This facility offer's a kind of security
of the lender towards repayment of loan.
Co-applicant
A person who applies to the lender along with the
applicant to avail a personal loan. The income of
the co-applicant is clubbed with that of the applicant
to arrive at the maximum loan amount. Some lenders
insist on a co-applicant when the amount of loan sought
is more than certain pre-specified limit.
Collateral
Assets that can be used to back up a loan which you
obtain with a finance company. If you fail to pay
the loan as agreed, the finance company can take these
assets.
Collection
The process of forcing a borrower to pay what he owes
on a loan and, if it comes to that, to proceed with
foreclosure
Compound
Interest
The interest calculated on the principal balance as
well as the accumulated interest is called compound
interest. It is usually higher than the simple interest.
Credit
History
The record of how you've borrowed and repaid debts.
Credit
Limit
The maximum amount that you can borrow. Your credit
limit is calculated based on a lot of factors such
as your personal profile, credit history, net income,
etc. More commonly it is a multiple of your net income.
Credit
Report
Credit report is a documentation of the credit history
containing information about your credit experiences,
such as your bill-paying history, the number and type
of accounts you have, late payments, collection actions,
outstanding debt, and the age of your accounts, is
collected from your credit application and your credit
report.
Credit
Scoring System
A Statistical system used by creditors to compare
your credit history with the credit performance of
other consumers with similar profiles. A credit scoring
system awards points for each factor that helps predict
who is most likely to repay a debt. A total number
of points- a credit score-helps predict your creditworthiness.
Debt
An amount of money owed by one person, company, organization
or other entity to another.
Default
Failure to meet legal obligations in a contract; specifically,
failure to make the monthly payments on a mortgage.
IF this happens, you can end up losing the house.
Delinquency
Failure to make payments on time. This can lead to
foreclosure.
Depreciation
A Decline in the value of property or asset over time.
EMI
Equated Monthly Installments (EMI) are installments
towards repayment of a loan, lease or hire purchase
agreement. As banks and finance companies conduct
very high volumes of retail business it becomes easier
for them to monitor and manage installments that are
constant in amount.
Guarantor
The person who promises to pay a debt or perform an
obligation contracted by another if the original party
fails to pay or perform according to a contract.
Guarantee
A promise made by one party to pay a debt or perform
an obligation contracted by another if the original
party fails to pay or perform according to a contract.
Fixed
Rate lending
When in a contract of loan the rate of interest is
fixed and there is no clause as to the change in the
rate of the interest with some other rate as the benchmark
it is called Fixed Rate Lending. In this type of lending
the rate of Interest does not changes during the period
of the contract.
Flat
Rate of Interest
A method of calculating the interest rate based on
the total outflow of money. The method does not take
into consideration the time value of money and is
thus a crude measure. Flat rate of interest is the
% paid in excess of the finance amount, and is calculated
on per year basis.
Hypothecation
A hypothecation is an equitable charge on the goods
without possession, but not amounting to a mortgage.
The contract is done to secure a debt.
POINTS
TO REMEMBER BEFORE APPLYING FOR A LOAN
The
tenure
Salaried
Individuals
