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Taking an education loan? From interest rates to margin money, 5 key things you need to know

Priyadarshini Maji
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Education costs over the last few years have increased tenfold, be it for higher education or secondary education. Most people opt for an education loan to finance it. However, just like all other types of loans, it is essential to collect more and more information when taking an education loan.

There are now several banks along with other financial institutes, that offer such loans. Experts say an education loan is an ideal way to fund a student's higher studies at a college or university, both in India or abroad. As per the bank or the lending company, if you are eligible to take an education loan, you can take a loan for yourself, or for your spouse, and children. Additionally, if you are a legal guardian to a child, you can also take an education loan for them.

Here are a few things you should know about education loan to make an informed borrowing decision;

Eligibility criteria

First, see if you fulfill the eligibility criteria for the loan. Important criteria include your credit score, existing loans, income, age, etc. which are taken into consideration by the lender. Note that, the eligibility criteria differ from banks to financial lending companies. While the requirements vary among lenders, between bank to the bank they are more or less the same.

Keep in mind that an education loan is not available for every course, every college or university. Certain colleges, universities, types of courses or particular countries are not considered by banks or lending companies when approving for a loan.

Secured or unsecured

If you are comparing education loan options, first make sure whether you want a secured loan or an unsecured loan. Education loans are generally available in both variants.

If you go with the secured loan option, you will be required to provide collateral like your home against the loan amount, unlike unsecured loans, there is no collateral required. Before applying for a loan decide if you want a secured or an unsecured loan as this has a significant impact on the interest rate, loan amount and loan tenure.

Interest rate

This is what most starts with, comparing interest rates. Comparing the interest rate between possible lenders is important as it will significantly impact the overall amount you as the borrower repay to the lender. Education Loan interest rate varies considerably between lenders, based on your eligibility, loan amount and loan tenure. Other than banks, financial lending companies have usually higher interest rates as they offer a loan for offbeat locations and courses which are generally turned down banks.

Normally, the interest rate varies between 12-15 per cent on top-up loans, however, some top banks in India offer education loans starting at just 11.5 per cent per annum.

Loan tenure

In the case of the unsecured loan generally, banks in India offer student loans for up to 8 years and up to 10 years in case of secured loans.

Note that, there is an additional moratorium period of around 6 months after course completion wherein the borrower can only pay the interesting part of the loan. The moratorium period also varies between lenders.

Margin money

Margin money in education loans works like down-payment that the borrower needs to make. A certain percentage of the total cost of education or course needs to be paid by the borrower. For instance, if the fee of a course is Rs 20 lakhs, even if the borrower meets their eligibility requirements, the bank might approve only a loan of Rs 16 lakhs.

The borrower needs to pay a margin of Rs 4 lakh from his/her own pocket. Hence, check the margin requirement of the lender before signing the papers.