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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. |
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| 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
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 surprises.
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 assessor 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: parents who have taken
loans for the higher education of their children
cannot claim this deduction.
The Relevant section/rule is Section
80E of the Income Tax Act.
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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. |
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PROCESSING
TIME
Most banks 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-obligate, 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! |
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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. |
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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 |
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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. |
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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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