Getting into your dream college or going abroad for higher education is what many students aspire for. But education is expensive, a situation made worse by high education inflation. Moreover, with the economy taking a hit due to the Covid pandemic, many parents might find it difficult to fund their child’s education. An education loan can be the solution whether you want to pursue a management course or any other.
A student can apply for such a loan in a public sector or a private bank or even a non-banking financial company (NBFC). But before applying for the loan, keep a few things in mind to avoid financial complications in future.
Improve Your Chances Of Getting The Loan
Academic record, chosen institute/course, loan amount and other factors play a role in loan approval. “The chance of getting a loan easily is more for reputed institutions that have better job prospects. The academic record of the student also has an important role,” says a senior executive from the loan department of Bank of Baroda (name withheld on request). “For premium institutions such as IITs and IIMs, often the interest rates may be low.
There are high chances of better employment after the completion of course and the risks (of unemployment) are low, so the interest rates will be lower for such premium institutions,” adds Adhil Shetty, CEO, BankBazaar, an online loan and insurance marketplace.
Keep Documents Ready
The list of documents to be submitted varies across lenders, but it is important to get all the documentation in place before one applies for the education loan. “Personal documents such as proof of residence and the admission letter from the institution must be there at the first instance,” says Raj Khosla, Managing Director, My Money Mantra, a loan platform. Parents’ income-related documents are also needed in most cases as students usually don’t have income proof of their own at that age, adds Shetty.
“There will also be an investigation of credit history (of borrowers). One needs to have a copy of their credit report. There also needs to be a co-applicant, typically the parents. Ensure your documents are as required by the lender. If you’re taking a high-value loan, collateral may help your case,” says Shetty.
Most lenders do not need collateral for loan amounts up to Rs 4 lakh; for amounts from Rs 4 lakh up to Rs 7 lakh, no collateral is needed but lenders ask for a third-party guarantor. For loans of higher amount, a student needs to provide full collateral.
Usually, property papers, insurance papers and gold are used as collateral, but for certain premium institutions, lenders give a concession. So, they may ask for less or no collateral.
Consider The Processing Time
The turnaround time varies across lenders. “It could be as little as two weeks or as long as two months. If you’re borrowing against security such as a fixed deposit, the approval can also be instant,” adds Shetty. The processing time also depends on the loan amount and need for collateral.
The time is mostly needed for pre-sanction inspection, and verification of co-applicant, residence and educational institute. Therefore, keep a buffer of around two months before you need the loan amount to be disbursed.
Eligibility And Margin Criteria
Both public and private sector lenders provide a multitude of loan options. Nevertheless, it’s important to compare the options. Study each lender’s eligibility criteria and then apply for the option that works best for you in terms of costs, interest rate, turnaround time, etc.
Often, for high loan amounts, lenders require a margin, in which case, a student has to pay the required amount to the lender or the institute, before the lender disburses the loan amount to the respective institute, explains the Bank of Baroda executive.
The government may provide a subsidy on loan repayment in some cases, depending on the parents’ income. “There are various schemes for lower rate of interest. Especially for girl students, many banks have discount on the interest rate,” says the Bank of Baroda official.
While many education loans are on offer, non-repayment can be a cause for concern if employability is not high. “When a student applies for a loan, he must be absolutely sure that he can repay his monthly installments after the completion of the course. Don’t forget that one needs to repay the loan at the end with interest and that is not cheap. Thus, sooner the student starts repaying the loan after completion of education, better will it be,” says Khosla.
One can take an education loan, but read all the terms and conditions before taking the plunge.