In part 1 of the 2 part blog series, we explained the meaning of 9 of the terms associated with education loan that borrowers come across while applying for loan to finance their study abroad. In this concluding part, we bring you the meaning of the remaining 11 terms. Click Here to go to Part 1 of this blog series.
LOAN PROCESS TERMS:
10. LOAN SANCTION LETTER – Loan sanction letter is issued by the lending institution to the borrower of education loan after the lender has given the final assent to the borrower’s loan application. It is done after the documentation and paper work required to grant loan is completed and the borrower has made all preliminary payments including the processing fee. The sanction letter mentions the amount that the lending institution has decided to lend to the borrower.
However, banks or lending institutions do not charge an interest the moment loan is sanctioned to the applicant. A borrower can either withdraw the entire amount or part of the sanctioned amount as per his or her requirement.
11. LOAN DISBURSEMENT – The actual transfer of education loan amount from the bank to the borrower or his or her educational institution or own bank account is referred to as loan disbursement. Banks start charging interest on education loan from the day the loan is disbursed.
TERMS USED BEFORE ACTUAL LOAN REPAYMENT STARTS:
12. MORATORIUM PERIOD – Also referred as ‘repayment holiday’, it is that that period of time before the borrower of education loan starts repaying it. Banks and financial institutions that lend money to students to finance their studies overseas do not require the borrower to start repaying the education loan from day one itself. Instead, students get repayment holiday which extends to the entire course duration plus six months before they are required to start repaying the loan in the form of equated monthly installments.
The moratorium ensures that there is no pressure on the student or student’s family when during course duration. Once the student completes the course, he or she can start repaying the loan after getting a job within six months.
13. PARTIAL SIMPLE INTEREST – The partial simple interest is charged by those lending institutions that provide unsecured loan. Unlike secured loan where the student can avail the moratorium or repayment holiday, the borrowers of unsecured education loan are required to pay monthly partial simple interest on the loan amount borrowed by them. The partial simple interest may range from Rs. 2,000 to Rs. 5,000 per month.
14. SIMPLE INTEREST – While secured education loans offer moratorium, they also provide an option to students to pay only simple interest on the education loan borrowed by them during the moratorium period. Paying this simple interest prevents the accumulation of interest accrued during moratorium which otherwise gets added to the principal amount at the end of the moratorium period. That could lead to higher EMI obligation. Thus paying simple interest during moratorium helps keep EMIs under control.
TERMS USED DURING REPAYMENT:
15. EMI – The Equated Monthly Installments (EMI) is the amount that a borrower of education loan is required to pay back to the lending institution every month in order to fulfill his or her loan repayment obligation. The EMIs consist of both the interest and principle component of the education loan and are spread over a long duration of time i.e 10 years. Therefore, a person who has taken an education loan with repayment tenure of 10 years has to pay
12 EMIs/yr. x 10 yrs = 120 EMIs to payback the entire loan.
16. AMORTIZATION SCHEDULE – The amortization schedule is a table that shows the list of periodic loan repayment. The amortization schedule not only lists the number of EMIs that a borrower has to pay but also the ratio of the principal and interest component of the EMI. In the schedule, the earlier periods, interest makes the largest component of the EMIs whereas in later periods, the principal constitutes the larger component of the EMI. The Amortization schedule helps the borrower in tax planning as he or she can claim tax benefit on the interest component of the loan.
17. LATE EMI PAYMENT FEE – This is the amount charged by banks and lending institutions from those who default on payment of EMI. A borrower who fails to pay the EMI on time or misses it completely due to any reason is asked to pay an amount in addition to the EMI amount as a penalty for the loss incurred to the bank due to the delay in receiving the EMI. The late payment fee is a percentage of EMI amount.
18. BALANCE TRANSFER – It is a process in which a borrower who already has existing repayment obligation for the money borrowed at a particular interest rate, takes a fresh loan at a lower interest rate to pay the remaining debt obligation on remaining portion of existing loan. Using balance transfer, the borrower can completely repay the current loan and then repay the existing loan at a lower EMI (due to the LOWER interest rate for the new loan).
Balance transfer facility is used by those who find it difficult to pay the EMI at the existing rate. While the borrower who avails the balance transfer facility ends up paying more and for a longer period of time as compared to previous loan, he gets relief in terms of lower EMI obligation.
19. LOAN RESCHEDULING – Also referred to as debt rescheduling, loan rescheduling includes extending or shortening the current repayment period to a new repayment period. This could be done in two ways, first the borrower agrees to pay higher EMI thereby shortening the existing repayment period or second, extending the current repayment period in return for the borrower paying lower EMIs.
TERMS USED IN ENDING THE LOAN OBLIGATION:
20. LOAN FORECLOSURE – Loan foreclosure involves ending or shortening the repayment period by paying, either a part of or the entire amount of the remaining principal of the loan. This facility is availed by those who happen to get large sum of money either through sale of property, maturity of fixed deposits or other saving schemes, capital appreciation etc. Loan foreclosure helps them remove or reduce their debt obligation on education loan. However, it must also be noted that some banks levy a fee on foreclosure.
LET’S WRAP UP!
Taking education loan requires meticulous planning with regard to both application and repayment of the money borrowed to finance higher studies abroad. We hope that this blog would help students, their parents and other borrowers of education loan get a fair understanding of the terms and jargon associated with education loans.
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.