Top 5 Mistakes to Avoid While Picking an Education Loan Provider

An Education Loan provides you with adequate funding to finance your higher education dreams. However, the lender you choose affects everything from interest rates to repayment flexibility. Avoiding common mistakes such as not comparing lenders for interest rates, ignoring loan terms and conditions etc., can guard you from financial distress during repayment and make your loan more affordable.
Since there are numerous factors involved in choosing the right lender for an Education Loan, there is a greater scope for committing such mistakes. In this blog, we will explore the common mistakes borrowers make when choosing the right Education Loan provider and how to avoid them. Read on!

Mistake 1: Not Comparing Interest Rates

The rate of interest is perhaps the most important cost of borrowing for any Education Loan. This component does not only affect the EMI amount but also the total interest you pay overtime. The higher the interest rate, the greater will be your monthly EMIs and the total interest you pay over the loan tenure.

To put it into perspective, consider two study loans of ₹20 Lakh taken for 10 years. The first one is at an interest rate of 9.5% where you pay a monthly ₹25,880 and a total interest of ₹11,05,541. The second is at 10% where you pay EMI of ₹26,430 and total interest of ₹11,71,618. Even a 0.5% lower interest rate saves you ₹66,077.

If the interest rate is low, so will your EMIs and total interest paid, effectively making the loan affordable. This is why it is important to compare lenders for interest rates before applying for a study loan for higher education. Even a 1% difference can significantly impact the overall cost of borrowing.

How to Choose a Lender Offering Lowest Interest Rates

• Compare interest rates across at least three to five lenders.
• Avoid considering the advertised rate. Consider the effective interest rate after adding processing charges.
• Choose whether a floating or fixed rate of interest suits your overall financial security.

A fixed interest rate remains the same throughout the tenure, while a floating interest rate can either increase or decrease based on changes in the market and economy. Choose an interest type that best suits your borrowing appetite.

Also Read: Education Loans for Bachelor of Fine Arts (BFA): A Complete Guide for Aspiring Artists

Mistake 2: Ignoring Education Loan Eligibility Criteria

Nothing feels more frustrating than securing admission in your dream university just to get rejected for an Education Loan at the final stage. One of the most common reasons for rejection is not meeting the Education Loan eligibility criteria.

The most common criterion includes the age of the student to the student's academic history, course type, recognition of the institution, and even the co-applicant or guarantor's financial history.

For instance, certain lenders sanction loans only for well-known universities or courses with good career opportunities. If your college isn't on their approved list, your loan may be rejected. Likewise, if the guarantor doesn't have the required income or good credit score, the loan could be sanctioned for a lower amount than expected or rejected altogether.

Ensure to Meet the Education Loan Eligibility Criteria

• Age Requirement: Ensure that you meet the minimum and maximum age criteria when choosing a lender for your Education Loan.
• Academic Record: Showing a good academic record in HSC and graduation is essential.
• Course and Institution: Admission should be ascertained in a career-oriented course in a recognized and accredited institution in India or abroad.
• Nationality: You must be an Indian citizen to apply for an Education Loan.
• Co-applicant: Co-applicant is usually a parent, a guardian, or a spouse, particularly among students who do not have a steady income.
• Collateral/Security: Tangible collateral or a guarantor may be required, depending on the amount of the loan and policies.

Also Read:  Understanding How Your CIBIL Score Affects Education Loan Eligibility

Mistake 3: Not Reading the Terms and Conditions Properly

Education Loan terms and conditions outline everything from interest rates to repayment schedule, and the actual cost of the loan. Loan documents also contain clauses on processing fees, prepayment penalties, late charges, or even required insurance policies. Such additional terms might turn a seemingly low-cost loan into an extremely costly loan in the future.

For a ₹20 Lakhs loan, even a 3% processing fee means ₹60,000 will be deducted as charges when the loan amount is sanctioned. Likewise, when you swiftly find employment after your education and wish to prepay your loan, certain lenders may charge you a prepayment penalty, reducing your overall savings.

Sign the Agreement After Reading All T&Cs

• Always request for the full disclosure of fees, including processing fees, insurance premiums, foreclosure charges, and late fees.
• Take special notice of repayment terms during the moratorium period.
• If you are not clear on a condition, make the loan official describe it in writing.

Taking time to read the terms and conditions ensures that you do not sign up for a loan that later proves to be a financial trap.

Also Read: Education Loan For CA

Mistake 4: Repayment Flexibility

In case the lender does not provide you with repayment flexibility, the repayment itself will become challenging once the moratorium ends. This is why you must always choose a lender that offers a flexible repayment plan to ease paying back the loan.

For example, some lenders require borrowers to start paying the EMIs immediately after the study period with no grace or moratorium period. This can be difficult when you have not yet secured employment. Some lenders also do not permit EMI restructuring when there are fluctuations in income, and in such cases, you will have to struggle to make the EMI payments.

Flexible repayment terms, like allowing partial prepayments or EMI adjustments, can ease the burden significantly.

Know Your Student Loan Repayment Terms Upfront

• Confirm whether the lender offers a moratorium period and how long it lasts.
• Check if you can reschedule EMIs according to your future income or get part prepayments at no extra cost.
• Understand what happens in case of defaulted payments and whether the lender offers a grace period.

Also Read: What Legal Action Is Taken Against Education Loan Defaulters?

Mistake 5: Choosing a Lender Solely Based on Loan Amount

It's only human nature to be swayed by the lender who can offer the highest loan amount. After all, more money means more financial flexibility and peace of mind to cover all fees and living expenses. However, focusing only on the highest loan offer without considering other factors like Education Loan interest rates and charges or flexible repayment options is a mistake that will cost you years of financial stress.

The higher the loan amount, the higher the EMIs, and if the rate of interest is greater, then the long-term interest will be higher. Numerous borrowers realise this very late in life and often fall into a debt trap.

Know Your Exact Needs and Compare Lenders

• Calculate your exact financial requirements to avoid applying for a higher loan amount than required.
• Ensure that the loan amount and the repayments are comfortable for you after your academic course.
• Consider other facilities offered by the lender, including fee disbursement to the institution or top-up facilities with flexibility.

Also Read: Understanding How Education Loan Works: Types, Benefits, and Process

To Conclude

Education is one of the best investments you can ever make for your future. However, choosing the wrong Education Loan provider can lead to more worries than achievements. This is why you must always choose a lender that provides low-interest education loans with flexible repayment options and no hidden charges.

This is exactly what we offer at Poonawalla Fincorp – a collateral-free Education Loan at competitive interest rates without any hidden charges. Invest in your future now by choosing us as your Education Loan partner. Apply for an Education Loan that empowers, supports, and simplifies your academic journey.

Frequently Asked Questions

Can I apply for an Education Loan if my chosen university is not on the lender's approved list?

Most lenders finance only courses and institutions from their approved list. It is best to always confirm with the lender before applying.

How does a moratorium period affect the overall cost of my Education Loan?

A moratorium period can make an Education Loan more expensive because interest keeps adding up during this time. Later, this interest is usually added to the principal loan amount, increasing the total repayment. Always check with your lender before applying.

Is it better to choose a floating or fixed interest rate for education loans?

Floating rates can be more affordable if rates drop, but fixed rates provide stability and predictable EMIs.

Will my co-applicant's credit score impact my Education Loan approval?

Yes, lenders usually assess both the applicant and co-applicant's credit score and income to decide eligibility and loan terms and conditions.

Can I make partial prepayments on my Education Loan without penalties?

This depends on the lender. Some allow penalty-free prepayments, while others charge a fee. This is why it is important to read the fine print and check the terms carefully.