With increasing number of Indian students heading overseas to countries like the US, UK, Canada, Australia and New Zealand, the demand for overseas education loans has been growing steadily in last several years. Students seek education loans to pay the tuition fees and living expenses during the course duration and hope to repay it after securing a job overseas.
And while getting education loan has become much easier and faster, it still requires one to have basic understanding of certain terms and jargons that are associated with education loan in order to make correct choices while applying for overseas education loan. In part 1 of this 2 part blog series, Student Cover tries to explain 9 such terms associated with education loan. The remaining 11 terms are explained in part 2. Click Here to go to part 2.
TYPES OF EDUCATION LOANS
1. SECURED EDUCATION LOAN – It is the money lent by banks or financial institutions to the borrowers in return for specific movable or immovable property that the borrower submits to it as collateral. This mortgaged property remains in the bank’s or financial institution’s custody till the borrower repays the entire loan with interest.
2. UNSECURED EDUCATION LOAN – It is the money lent by banks or financial institutions to the borrowers based on their creditworthiness. Unlike secured education loans, these loans do not require the loan applicant to mortgage any property to the bank. Based on one’s family income, past loan repayment record, CIBIL score; the bank or financial institution lends money to the borrower. Since nothing needs to be kept as collateral, they are also called ‘collateral-free’ or ‘mortgage-free’ loans.
VOLUME OF EDUCATION LOAN DEPENDS ON
3. COLLATERAL – These include both movable and immovable assets such as non-agricultural land, flat etc. which is mortgaged by the borrower with the bank or financial in return for the money borrowed as secured education loan. The volume of education loan sanctioned by the lending institution depends on the monetary value of the asset that has been mortgaged. For example, if one requires education loan for say Rs. 25 lakhs, the value of the asset kept as collateral should be well over Rs. 25 lakhs.
4. MARGIN MONEY – It is ratio of the expenditure borne by the borrower to the total expenditure. In education loan terms, a loan applicant whose cost of education is say, Rs. 100 Lakhs, the bank or the financing institution may agree to finance only 95% of the total cost and the remaining 5% has to be borne by the individual from his or her own pocket. This 5% is the margin money.
The bank will thus lend Rs. 95 Lakhs while the applicant has to manage Rs. 5 lakhs from his/her own pocket. If the margin is high, say 10%, the amount of loan given by bank becomes less i.e. 90 Lakhs.
5. CIBIL SCORE – The CIBIL score is a three digit numeric summary of a person’s credit history. This score is based on a person’s past credit history and is calculated based on that person’s repayment record of loans taken in the past. The CIBIL score helps lending institution determine the creditworthiness of the loan applicant. The CIBIL score is required for those applying for unsecured education loan.
6. RATE OF INTEREST(ROI) – The rate of interest, usually expressed in percentage terms is the amount charged by the bank annually for the amount lent to the borrower. It is compounded annually and helps determine the amount that the borrower has to repay over a period of time. The higher the rate of interest charged by the bank for education loan, the higher would be the amount that the borrower has to pay back to the bank.
7. FIXED ROI – The fixed rate of interest is that rate which remains the same during the entire repayment period. International lending institutions as well as those based in the US charge a fixed rate of interest. Having a fixed rate of interest helps keep the amount that a person has to repay constantly.
8. FLOATING ROI – Almost all banks and financial institutions providing education loan in India charge interest which is floating in nature. A floating rate of interest changes with time and depends on a several factors such as the Central Bank’s (RBI) lending rate to financial institutions or banks own lending policy. Thus, the interest charged on the borrowed amount may either increase or decrease with time. As a result, the amount that the borrower has to repay back to the financial institution also keeps changing.
9. PROCESSING FEE – The processing fee is the amount charged by lending institutions for the administrative and other expenses incurred by them in processing the loan application. The processing fee may either be a flat sum or a percentage of the amount borrowed by the loan applicant.
“CLICK HERE TO GO TO PART 2 OF THE BLOG”
Disclaimer: This blog was written based on the personal research of the writer. Readers are advised to exercise discretion and read the loan document, its terms and conditions as well as meaning of those terms as mentioned in loan documents before taking any education loan. Student Cover will not be liable for any wrongful interpretation of the content of this blog.