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The
times are changing, and changing fast. The few years
have witnessed a high increase in students aspiring
for MBA and professional courses. The number of colleges
offering these courses is also on the rise. With fees
of these courses skyrocketing, students are queuing
for educational loans from banks. Gone are the days
when one had to run from pillar to post to borrow money
to study. Now a variety of Instruments are available
for pursuing higher studies.
Almost
all nationalised banks offer educational loans to students
for studies in India and abroad. Besides some private
trusts are running study loan scheme, the terms and
conditions of which vary from organisation to organisation.
To garner students to avail educational loan nationalised
and private banks have even started putting their posters
in college campus and promote their schemes. This trend
is catching on and one will see lot of students going
in for educational loan once the awareness level increases.
Let
us look at bank loans for funding your Post Graduation
courses in India.
POINTS
TO REMEMBER BEFORE APPLYING FOR A LOAN
The
tenure
A
longer repayment tenure would mean more interest payments
on your loan. Before you set out to complete the paperwork
for a loan calculate the Equated Monthly Installments
(EMI) to know how much you are expected to pay and whether
you have the capacity to pay that in time.
The
Loan Costs
Never
forget the fee charged for disbursing a loan to you.
Some banks have a higher fees than others. You need
to take care of this important component of loan disbursements.
The
Prepayment Dilemma
Many
public sector banks do not charge you a penalty for
prepayment of loans whereas many private banks ask for
a penalty payment. Check this out upfront.
The
Fixed Interest Rate
You
need to know well in advance that interest rates do
not fluctuate. If they fluctuate the choice is yours.
There are quite a few fixed interest rate loans and
if you are worried about variable interest rates then
the best option is to go for a fixed interest rate to
avoid suprises.
Monthly or Annual Repayments?
You
need to check out the repayment burden on yourself and
see if an annual payment suits you. If not then go for
the monthly plan.
Taxes
on loans
One
can claim a deduction of up to Rs. 40,000 on the amount
paid out of the taxable income in the previous year.
This is a comprehensive limit, and includes principal
and interest, if any.
One
can claim the deduction if you've taken a loan from
a financial institution or an approved charitable institution
to pursue full-time courses for graduate or post-graduate
level studies in engineering (including architecture),
medicine and management or a post-graduate course in
applied sciences or pure sciences, including mathematics
and statistics.
The
deduction is allowed for the first assessment year relevant
to the previous year when the assessee starts repaying
the loan and for seven assessment years immediately
following thereafter. In other words, the deduction
is available for a maximum period of eight years from
the first year of repayment. The deduction shall be
allowed for the period of loan and interest repayment,
if it is repaid in full before the end of the above
period.
Note:
This deduction cannot be claimed by parents who have
taken loans for the higher education of their children.
The
Relevant section/rule is Section 80E of the Income Tax
Act.
DOCUMENTATION
REQUIRED
Typically
the following are the basic minimum documentation to
be provided to the bank while availing of loans from
them:
Mark sheet of last qualifying examination for school
and graduate studies in India
Proof of admission to the course
Schedule of expenses for the course
Statement of Bank account for the last six months
of borrower
Income tax assessment order not more than 2 years
old
Brief statement of assets and liabilities of borrower
Identity and give proof of residence.
Copies of letter confirming scholarship, etc.
Copies of foreign exchange permit, if applicable.
PROCESSING
TIME
Most
bank claim to disburse the loan money within one to
two days after the required papers are submitted to
them. A checklist is provided to the person seeking
loan giving the details of the required documents
like proof of age, address, admission expenses, assets
and liabilities of co-obligants, details of collateral
security, certificate of last qualifying examination
etc.
However
experienced loan-seekers say getting loan from banks
is an uphill task. There are students who could get
the loan, but after the deadline for fee deposit had
expired!
DOCUMENTATION
TERMINOLOGY
Adjustable Rate Loan
Adjustable rate loan is one where the rate of interest
is linked to the Prime Lending Rate. It is also known
as "Floating Rate Loan". If you have opted
for adjustable rate loan, then you stand to gain if
interest rates drop. Likewise you need to be prepared
to take the risk when interest rate increase. Therefore,
in this case the gain/ loss of interest rates fluctuation
is borne by the borrower. The rate on loan is generally
revised on regular intervals.
Application
A form used to apply for a loan, on which you'll put
relevant information about yourself. Also refers to
the whole process of applying for a loan.
Appreciation
An increase in the value of a property due to changes
in market conditions, or for other reasons. The opposite
of depreciation.
Asset
Anything with a rupee value that you own. Your assets
are tallied up when the bank is trying to figure out
what it can afford to lend you. You don't have to
own something "free and clear" for it to
be considered an asset. Say you have a house, on which
you owe money to a bank or mortgage company. The amount
you owe is considered a liability; the amount you've
already paid off is an asset.
Bonafide
In good faith, real, not fraudulent.
Borrower Classification
Lenders classify borrower based on their personal
and professional profile. Most common borrower classifications
are:
Salaried Individuals
Self Employed professionals
Self Employed Individuals.
Breach
A violation of any legal obligation.
Check-off
Facility
This is a facility by which the employer of the borrower
agrees to deduct the installment amount from his salary
and pay the same directly of the lender. In some cases
the lender imposes special lien on payment of borrower's
provident fund. This facility offer's a kind of security
of the lender towards repayment of loan.
Co-applicant
A person who applies to the lender along with the
applicant to avail a personal loan. The income of
the co-applicant is clubbed with that of the applicant
to arrive at the maximum loan amount. Some lenders
insist on a co-applicant when the amount of loan sought
is more than certain pre-specified limit.
Collateral
Assets that can be used to back up a loan which you
obtain with a finance company. If you fail to pay
the loan as agreed, the finance company can take these
assets.
Collection
The process of forcing a borrower to pay what he owes
on a loan and, if it comes to that, to proceed with
foreclosure.
Compound Interest
The interest calculated on the principal balance as
well as the accumulated interest is called compound
interest. It is usually higher than the simple interest.
Credit
History
The record of how you've borrowed and repaid debts.
Credit
Limit
The maximum amount that you can borrow. Your credit
limit is calculated based on a lot of factors such
as your personal profile, credit history, net income,
etc. More commonly it is a multiple of your net income.
Credit
Report
Credit report is a documentation of the credit history
containing information about your credit experiences,
such as your bill-paying history, the number and type
of accounts you have, late payments, collection actions,
outstanding debt, and the age of your accounts, is
collected from your credit application and your credit
report.
Credit
Scoring System
A Statistical system used by creditors to compare
your credit history with the credit performance of
other consumers with similar profiles. A credit scoring
system awards points for each factor that helps predict
who is most likely to repay a debt. A total number
of points- a credit score-helps predict your creditworthiness.
Debt
An amount of money owed by one person, company, organization
or other entity to another.
Default
Failure to meet legal obligations in a contract; specifically,
failure to make the monthly payments on a mortgage.
IF this happens, you can end up losing the house.
Delinquency
Failure to make payments on time. This can lead to
foreclosure.
Depreciation
A Decline in the value of property or asset over time.
EMI
Equated Monthly Installments (EMI) are installments
towards repayment of a loan, lease or hire purchase
agreement. As banks and finance companies conduct
very high volumes of retail business it becomes easier
for them to monitor and manage installments that are
constant in amount.
Guarantor
The person who promises to pay a debt or perform an
obligation contracted by another if the original party
fails to pay or perform according to a contract.
Guarantee
A promise made by one party to pay a debt or perform
an obligation contracted by another if the original
party fails to pay or perform according to a contract.
Fixed
Rate lending
When in a contract of loan the rate of interest is
fixed and there is no clause as to the change in the
rate of the interest with some other rate as the benchmark
it is called Fixed Rate Lending. In this type of lending
the rate of Interest does not changes during the period
of the contract.
Flat
Rate of Interest
A method of calculating the interest rate based on
the total outflow of money. The method does not take
into consideration the time value of money and is
thus a crude measure. Flat rate of interest is the
% paid in excess of the finance amount, and is calculated
on per year basis.
Hypothecation
A hypothecation is an equitable charge on the goods
without possession, but not amounting to a mortgage.
The contract is done to secure a debt.
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