The number of students availing education loan is increasing every day as the cost of higher education is on a surge. This has also lead to an increase in the total education loan capital and even the NPA percentage. As they approach the banks and the NBFCs for a loan, applicants often forget to study the education loan processes and the key terms.
Having a slight understanding of the key terms can smooth your experience while dealing with the bank representative as:
You won’t face difficulty in understanding the process as they speak.
You won’t get mislead.
You can contribute to the conversation and make things more clear.
Banking and finance have a lot of terms which common people rarely talk about in day-to-day life. Let’s have a look at some of these prominent terms which you will definitely encounter during your education loan disbursal.
Base Rate is the minimum lending rate established by the banks below which they are not allowed to lend loans. All banks, including govt. and private banks, have their own base rates for education loans. This also includes SBI Education Loan and Pragathi Krishna Gramin Bank Education Loan.
Base rates are established to maintain transparency and ensure that most of the benefit is passed down to the customers. However, the concept of Base Rate has been abolished lately. What follows is MCLR.
MCLR or “Marginal Cost of fund based Lending Rate” has replaced now the concept of a Base Rate. MCLR system was established by the RBI on April 1, 2016. MCLR system is more beneficial than the Base Rate system as in the case of a repo rate reduction by the RBI, the benefit will pass more easily to the customers.
Some banks keep a provision for charging a margin from their customers. In certain cases, when the cost of education is high or sometimes for prominent institutes, banks offer to fund only a percentage of the education. So, if a bank charges 2% margin and your fee is INR 1,00,000, then the bank will provide you with INR 98,000 while you will need to arrange for INR 2,000 on your own.
Moratorium period is the special period during education loan term when a borrower is not required to make any repayment. This feature is specially included in education loan as students can pay only after completing education and getting a job. Banks understand that it might take students some time to get a job. Moratorium period is mostly kept at 1 year more than the duration of education.
Most of us are aware of the concept of EMI (equated monthly instalment). EMI is the fixed payment which you will make to the bank on a particular date every month during your repayment.
Repayment Period is the period following the moratorium period when the student finally starts the repayment of the loan by depositing EMIs. Earlier the Repayment Period used to be of different lengths, but as per the latest guidelines, all banks are required to keep it at 15 years now.
Penal Charge is the penalty you have to pay to the bank if you have an overdue amount. If you delay your EMIs or make payments late, the bank will charge you Penal Charge. This amount increases with every passing day.
A collateral is a deposit asked by the bank as security to give you a loan. The collateral can be in the form of a third party guarantee or property or some important documents. Some banks even consider LIC policies as collaterals.
A top-up loan is the one which is provided over an already existing loan. Such a loan is given to students who want to pursue further studies rather than opting for a job. In such cases, the combined repayment is shifted to 1 year after the completion of the second course.
A subsidy is an assistance provided by the government to the students by giving rebates on the interest deposited. There are various subsidy schemes running including the Skill Loan Scheme, Central Scheme for Interest Subsidy (CSIS) and Padho Pardesh.
So next time you visit a bank to talk about education loan, make sure you know these terms. It will also let the bank representative know that you are a well-informed person.