Education Loan Terms: A Glossary of Common Terminology
An Education loan is the popular choice of funding for most Indian students who wish to pursue their higher education in India or abroad. While conducting their research on the education loan lenders, there is a high chance for such higher education aspirants to get lost in technical jargon. This article will give you a thorough understanding of some of the most commonly used education loan terms in clear, simple language. The education loan terms listed in this article are applicable to both secured and unsecured education loans in India. Certain education loan terms are also applicable to those of foreign money lenders. Let us begin by understanding the two different types of education loans in India
Secured Education Loan: A secured education loan is a type of education loan which is lent by mortgaging certain types of assets as collateral security to the lending bank. These loans are also known as collateral education loans. Simply put, in order to borrow a secured education loan, applicants are required to pledge some kind of asset as collateral. This asset can either be an immovable property or liquid security.
Unsecured Education Loans: Unsecured education loans are education loans without collateral, or no-collateral education loans. In order to borrow these loans, candidates are not required to pledge anything. These loans are mainly granted by private banks and NBFCs (Non Banking Finance Companies).
Basic Education Loan Terminology
Principal amount: This education loan term is commonly used to refer to the basic loan amount granted by lenders to students in need. The amount required by candidates as an education loan amount is called the principal amount.
Interest rate: The interest rate refers to the money paid to the lender in exchange for borrowing the principal amount. This education loan term is often considered in terms of percent per annum by Indian lenders of abroad education loans. The interest rates of Indian lenders are decided on the basis of MCLR, while the APR of international lenders are based on LIBOR (London InterBank Offered Rate).
Co-applicant/Co-signer: A co-applicant refers to the person who signs the education loan agreement with the loan applicant. A co-applicant is liable to repay the education loan, should the loan applicant fail to do so. International lenders also address co-applicants as co-signers. In order to apply for an education loan in India, the co-applicant has to be someone who is a close family member of the loan applicant. Parents and siblings are mostly preferred by lenders as co-applicants.
Guarantor: A guarantor is basically a third party (someone other than a close family member) whose assets have been pledged as collateral security against the collateral education loan. A guarantor is someone whose property/liquid assets you pledge as collateral against an education loan. Please keep in mind that a guarantor and a co-applicant are not the same. This guarantor can be anyone other than your parents and siblings, e.g, uncle, aunt, cousins, etc.
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Education Loan Terms Related To Interest Rates
Accrued Interest: This education loan term refers to the interest earned by the lender and payable by the borrower. The interest for every day is calculated on top of the unpaid principal balance.
Floating Interest Rate: A floating interest rate refers to interest rates which are likely to change over a short period of time. The interest rates of many international education loan lenders, as well as certain other NBFCs are floating interest rates.
Fixed Interest Rate: A fixed interest rate refers to education loan interest rates which do not keep changing within short periods of time, and even if they do, the change in interest rates do not affect those of candidates who had already borrowed education loans.
Marginal Cost of Funds-based Lending Rate (MCLR): This is the benchmark value on the basis of which the education loan interest rates of most Indian lenders is fixed. This education loan term is often used on the online education loan pages of prominent lenders in the country.
APR (Annual Percentage Rate): This education loan term is often used by international lenders to indicate the interest rates charged by them for abroad education loans. For e.g, international lenders like Prodigy Finance often address their interest rates as APR.
Education Loan Terms Related to Secured Education Loan Process
Collateral: Asset mortgaged by the borrower for an education loan. Collateral security basically refers to an immovable property or liquid assets pledged to the lending bank in order to borrow an education loan.
Loan Margin: This education loan term is mostly used by lenders of collateral education loans which are granted by government banks in India. A loan margin basically refers to a candidate’s contribution towards their total expenses for higher education abroad or in India itself. This term is usually expressed in percentage.
For e.g, you may have come across terms like ‘Loan margin of SBI is 10%’. This means that loan applicants are liable to make payment of 10% of their total expenses. The remaining 90% will be contributed by the lender. Loan margin varies from one profile to another.
Education Loan Terms Related to Disbursement
Education loan disbursement: This education loan term is often used by lenders to refer to the amount of education loan released to candidates. When the lending bank releases the education loan amount to candidates, the process is called a disbursement of education loan.
Pre-visa disbursement: This term refers to the disbursement of a certain part of the loan amount before candidates begin their visa application process. A pre visa disbursement is often requested by candidates who have borrowed abroad education loans to study in countries like Germany and Canada. In order to get a student visa to study in these countries, it is mandatory for students to deposit their one year’s living expenses and submit proof of the same.
Terms Related to Education Loan Repayment
A lot of higher education aspirants often wonder about certain facets of the education loan repayment process in India. The following terms are often used interchangeably by the lenders of education loans in India.
Loan Tenure: This is one of the common education loan terms used to indicate the total tenure of repayment of education loans. For example, a loan tenure of 15 years indicates that candidates are eligible to repay their education loan within a span of 15 years.
Amortization: This term refers to a gradual repayment of the education loan in the form of periodic installments of the principal amount and the interest amount.This term is often used by a lot of international lenders to indicate the repayment process of abroad education loans.
Moratorium period: A moratorium period refers to a loan holiday granted by government banks to students who have borrowed secured education loans. All students who have availed a government bank education loan to fund their higher studies are eligible to avail this moratorium period. The moratorium period lasts for the entire course duration of loan applicants. Government banks charge simple interest for this moratorium period.
Grace period: A grace period is the extension of moratorium period beyond a student’s course duration. All government banks grant an additional six months as grace period for students who are unable to find employment immediately post their course. The total duration of this grace period is entirely dependent on the policies of the lenders.
Deferment Period: A deferment means an extension on the repayment of the principal amount granted to loan applicants by the lender.
Loan Waiver: A loan waiver is granted to students who have been unable to find employment for five consecutive years post their course. Students are required to provide genuine reasons behind their claims of not being able to repay their education loan to lending banks. The decision of waiving the education loan entirely depends on the policies set by different lenders.
Loan write-off: A loan write off happens when the assets pledged as collateral become non-performing assets, i.e, the asset can no longer generate a revenue which may help the lending bank recover any part of the loan. In such a scenario, where the chances of recovering the loan amount may seem remote, a bank writes off the entire loan. However, borrowers are still liable for repayment.
The education loan terms listed in this article are frequently used in the education loan process. More often than not, students who embark on the education loan journey are often misguided by lenders and other education loan services due to their incomplete knowledge of education loan terminologies. With this article, we aim to bridge the gap between students and the education loan process. Keep reading our blog to know more about the topic of discussion of our next article.
Note: WeMakeScholars is an organization funded and supported by the Government of India that focuses on International Education finance. We are associated with 10+ public/Pvt banks/ NBFCs in India and help you get the best abroad education loan matching your profile. As this initiative is under the Digital India campaign, it’s at free of cost. The organization has vast experience dealing with students going to various abroad education destinations like the US, Canada, UK, Australia, Germany, Sweden, Italy, China, France among others