Loan Repayment or Loan Prepayment: Clear your confusion & Save Big! | GyanDhan
Published date: 12 Nov 2020
Updated on: 12 Nov 2020
Education loans help bridge the gap between exorbitant tuition fees and higher education abroad. There are several lenders in the market offering the best loan products to students. But, however easy it is to finance the abroad education dreams with loans, it requires equally meticulous planning to repay them.
Oftentimes, students find it difficult to repay the amount they borrowed to study in an abroad university. It starts with one missed repayment and snowballs into a raging debt with interest on interest being charged. Before you know it, your loan amount multiplies into a monstrous figure that ends up wrecking your credit score and future creditworthiness.
This issue is also a cause for concern for banks who faced 9% of education loans being declared NPA in the year 2019. This number has had a steep rise in recent years.
It is a delicate play of repaying the loan on time to avoid prolonged financial debt. But when should you start repaying your education loan?
What is the ideal time to start your education loan repayment?
The time to start your education loan repayment depends on your financial strength. Accordingly, students should calculate and plan their loan tenure and repayment. There are many lenders that offer EMI calculators to help students figure out their repayment plans. Most calculators lack customization, such as the disbursement period of the loan amount, grace period, etc. It is easily remedied by GyanDhan’s easy-to-use education loan EMI Calculator with customizations as well as an EMI schedule that they can save for future use.
This loan repayment plan is crucial to balance the financial debt after the study period is over. Most students make use of the moratorium period that is provided by lenders and start the loan repayment after the completion of the said period. Even so, students are unsure about the benefits of the moratorium period or when to start paying their education loans.
What is the moratorium period?
The moratorium period is the time period where the student doesn’t have to make any payments towards their education loan. The repayment in case of grace period starts after the study period. However, it should be noted that interest is charged during this time period as well, which is accrued even if you are not paying anything. It is later spread out equally to the pending EMIs. So, even though the repayment is deferred, it is not waived off. This accrued interest ends up increasing the EMI the student has to pay.
The moratorium period has its advantages and disadvantages, depending on the financial situation of the student.
What are the advantages and disadvantages of the moratorium period?
The right time to start your education loan repayment is intrinsically linked with the moratorium period.
Advantages of moratorium period -
The RBI asked the banks to provide students with this grace period to help students reduce the financial strain during the study period.
This period also ensures that the student takes on the responsibility of repayment after securing a job, and the burden of the repayment does not fall on the parents.
The bank does not charge any penalty on non-payment during the grace period.
Non-payment during the grace period also does not affect the credit score of the student.
Disadvantages of moratorium period -
Though the intent of the period is to reduce the financial burden of the students, it ends up increasing the burden post the study period by charging higher EMIs.
The other downside of putting off repayment is that it can result in longer loan tenure.
The mounting EMI not only increases the burden and the tenure, but it also costs more to the student because the interest is compounded during the repayment period. It is only during the study period the simple interest is charged.
Let’s do some calculations with the help of GyanDhan’s EMI calculator to figure out when you should start repaying your education loan.
For example - A student borrowed INR 20 lakhs to study in a Canadian university, a program which is 24 months long. The rate of interest offered to the student is 11%, and the loan tenure is 7 years.
Case 1 - No repayment during the study period
There is a grace period of 12 months, meaning the repayment starts after the course period + grace period. After 3 years, the student will start the repayment program with an EMI of INR 42,720, out of which INR 22,871 is the interest component, and INR 19,850 is the principal amount. The interest paid by the student during the loan tenure will be INR 15,88,528, and the total amount that will be repaid is INR 35,88,528.
Grace period
3 years (course period + 12 months)
EMI
INR 42,720
Total interest paid by the student
INR 15,88,528
Total amount repaid by the student
INR 35,88,528
Case 2 - Interest payments during the moratorium period
The student starts making full interest repayments immediately after the disbursement. The EMI (interest amount + principal amount) starts 6 months after the course ends. The EMI, in this case, is INR 34,245. The total interest paid by the student is INR 12,61,564, and the total amount that will be repaid during loan tenure is INR 32,61,564.
Grace period
-
EMI
INR 34,245
Total interest paid by the student
INR 12,61,564
Total amount repaid by the student
INR 32,61,564
Case 3 - EMI repayment during the moratorium period
The student starts making full EMI repayment (interest amount + principal amount) immediately after the disbursement. The EMI to be repaid is INR 37,210. The total interest that the student will repay is INR 7,75,063, and the total amount to be repaid is INR 27,75,063.
Grace period
-
EMI
INR 37,210
Total interest to be repaid
INR 7,75,063
Total amount to be repaid
INR 27,75,063
At a simple glance, it is evident that paying simple interest during the study period helps the student save up to INR 3,26,964; repaying EMI during the study period lowers the interest and total amount even further. The interest accrued does not get compounded in Case 2 and Case 3, whereas in Case 1, the student ends up repaying more money.
The total interest paid also varies depending on the loan tenure. In all the cases, the loan tenure is 7 years.
If the loan tenure is increased by 3 years -
The interest to be repaid in Case 1 increases by INR 5,35,701 - becoming a total of INR 21,24,229.
In Case 2, the interest to be repaid increases by INR 4,29,433 - becoming a total of INR 16,90,997.
In case 3, the interest to be repaid increases by INR 4,21,054 - becoming a total of INR 11,96,117.
It is crucial to consider these calculations before you settle for the number of years you want to repay your loan. A simple calculation can save you more than INR 4 lakhs. Not only this, making EMI payments or even simple interest payments during your study period considerably lowers the repayment . While this is subject to each student’s financial positioning, there are still ways that a student can earn a few extra bucks to pay off the interest while studying. Students can take up part-time jobs on or off-campus or apply for TAship or RAship.
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Some of the important questions and comparisons that a student should make before finalizing their education loan repayment program -
Amount of each EMI, as well as the number of the EMIs to be paid.
How, when, and how much loan amount has to be repaid.
How many EMIs can you afford to pay to close your loan?
What should be the ideal amount for the EMI?
How many months/years should it take/will it take to repay the entire amount?
Can you repay your education loan early?
Yes, you can repay your education loan early. All the major lenders do not charge any prepayment penalty from the student. The prepayment of an education loan requires some weighty calculations, planning, and a strict repayment schedule.
How can GyanDhan help you?
GyanDhan is a one-stop-solution for abroad education. We made a customizable EMI calculator to help students set a realistic goal for repayment. The tool helps you save the EMI schedule as well as presents all the figures/amount to be repaid clearly. You can make simple comparisons to choose the repayment schedule that suits your budget. You can also discuss the same with your assigned counselor for better understanding.
As always, GyanDhan offers all its services free of cost to the students. Looking to finance your abroad education and don’t know where to start? Just check your loan eligibility, and we will take care of the rest!
This is a companion discussion topic for the original entry at https://www.gyandhan.com/blogs/education-loan-repayment