US is home to some of the best Universities and Colleges in the world. However, the high-quality education in the US also comes with equally high cost. To finance higher education in the US, people usually take education loans from Public/Private Banks or Non-Banking Financial Companies (NBFCs) in India.
With so many financial institutions offering a vast array of education loans, it is not easy for one to decide which loan offer to accept. Therefore, in this blog, Student Cover tries to explain the 5 essential things that you should keep in mind while choosing an Education Loan scheme to finance higher education in the US.
#1 Rate of Interest
The rate of interest is what the bank or the financial institution charges from the borrower annually in return for the capital provided by it. It is the most significant aspect of any loan as it is what determines what the borrower would eventually have to repay back to the bank.
Higher interest rate means a borrower will have to repay more and a lower one means that he has to repay relatively less. The interest rates for education loans may range from 10% to 15% depending on the type of loan and the repayment period.
The interest rates may either be floating or fixed.
Floating Rate: The floating rates are usually linked to the country’s central bank’s lending rate. They are dependent on country’s monetary policy and may increase or decrease with time.
Fixed Rate: The fixed rates on the other hand remain the same from the time of borrowing till the end of re-payment period.
#2 Secured or Unsecured Loan?
Financial institutions offer two types of education loans depending on the volume of money borrower, the course stream and creditworthiness of the borrower. The two types of loans are
Secured Loans: Given generally by public and private banks, they are also called collateralized loans as the borrower has to keep either his land or an immovable property as collateral against such loan. They are less expensive, which means rate of interest charged on secured loans is less than unsecured loans. Since they are collateral based loans, there is no upper limit to the amount that one can borrow.
Unsecured Loans: These are generally given by Non-Banking Financial Companies and do not require a borrower to submit his or her land or property as collateral. They are given based on the course, the creditworthiness of the borrower and the student’s academic record. The interest rate of these collateral free loans is higher than secured loans. There is a limit to the amount that one can borrow as unsecured loans.
# 3 Processing Fee
This is the one time amount that a bank charges from a borrower. It varies from bank to bank. Generally it is a percentage of the borrowing amount although in rare cases, it can be a fixed amount. This fee is usually charged to make up for the cost incurred in processing the loan application, carrying out due diligence of the applicant’s documents, printing and other clerical expenses.
#4 Monthly EMIs
Equated Monthly Installment or EMI is what a borrower pays every month till he or she completely repays the entire borrowed amount with interest. The EMIs depend on the volume of loan and the interest rate. Lending institutions giving secured loans usually give a moratorium of 3 years and 6 months before the EMI kicks in. In case of unsecured loans too the EMI starts after 3 years and 6 months. However, the borrower of unsecured loan has to start paying simple interest on the loan from the day he or she takes up to EMI start date.
# 5 Repayment Period and conditions
Education loans usually have a repayment period of 10 years and EMIs are calculated accordingly. While the loan repayment period is generally not extended, some banks offering unsecured loans have a balance transfer option. Click here to know more about Balance transfer.
Let’s Wrap up!
Before choosing on any education loan, one should always check what is the rate of interest? Whether the loan is secured or unsecured? What is the processing fee? How much will be the EMI and what are the repayment conditions?
Disclaimer: The content of the following article is based on the personal research of the writer. Readers are advised to exercise discretion. Student Cover will not be liable for any wrongful interpretation of the content of this article.