Mistakes to Avoid When Taking an Education Loan for Higher Studies

Advancing to the next level of education marks a significant milestone in life. It opens doors to new opportunities, personal growth, and career advancement. However, for many, the path to higher education comes with financial challenges. Education Loans often serve as the bridge between aspirations and reality, making it possible for students to pursue their dreams.

Taking an Education Loan, like any financial decision, requires careful consideration and planning to avoid common pitfalls. In this blog, we will discuss some crucial mistakes to be avoided while availing an Education Loan.

9 Common Mistakes to Avoid When Taking an Education Loan

Taking an Education Loan can be a very significant turning point in pursuing higher education, whether in India or abroad. However, it is essential to approach the process with full awareness to avoid any hurdles. Here are some common mistakes to avoid when securing an Education Loan:

Not Researching Enough

Do thorough research on various loan options, comparing terms offered by both traditional banks and Non-Banking Financial Companies (NBFC) or Fintech companies that specialise in providing student loans. Understanding the details of each option can help you secure better loan terms, customised to help your financial needs. Additionally, exploring a diverse range of lenders can help reduce the risk, as you will have a broader understanding of your options.

Neglecting Eligibility Criteria

Before applying for an Education Loan, review the eligibility criteria thoroughly. Factors such as credit score, income, existing loans and age can have a major influence on securing the loan. Additionally, ensure that the loan covers your chosen course, expenses and the institution. For example, ICICI Bank provides Education Loans of up to Rs 2 crore to cover all your needs. Meeting these criteria increases your chances of approval and helps you get favourable terms and conditions.

Ignoring Loan Types

Education Loans come in two primary forms: secured and unsecured. Secured loans require collateral, while unsecured loans do not. Carefully consider which option aligns best with your financial situation and preferences, as it can impact interest rates, loan amount, and tenure. Some banks provide unsecured loans up to Rs 1 crore.

Overlooking Interest Rates

The interest rate on your Education Loan directly affects the total amount you will repay over time. Compare the interest rates offered by different lenders to find the most competitive option. Look for banks offering lower rates, as even slight differences can lead to significant savings in the long run. Moreover, be aware of whether the interest rate is fixed or variable, as this can impact your monthly payments and overall financial planning. Leading banks in India provide Education loans with interest rates starting from Repo Rate* + 3.75% (Spread) onwards.           

Underestimating Margin Money

Margin money, similar to a down payment, is a portion of the total educational expenses that you are required to fund yourself. Be aware of the margin requirements set by the lender and ensure you have sufficient funds to cover this aspect. Some lenders may offer loans with minimal or no margin requirements, which can be advantageous. Understanding the margin requirement is essential as it affects your initial financial burden and can impact the loan amount you need to borrow. Look for banks that offer no margin, such as ICICI Bank, which offers nil margin for premium institutions and 15% margin for other category institutions.

Overborrowing of Funds

One common major mistake to avoid when taking an Education Loan is overborrowing. It can be tempting to borrow more than necessary, especially when considering additional expenses like living costs or extracurricular activities. However, overestimating your financial needs can lead to unnecessary debt burden and financial strain in the future. Every rupee borrowed needs to be repaid with interest, so borrowing responsibly ensures that you can manage your loan repayments comfortably after graduation. Additionally, reducing unnecessary borrowing can lower overall interest costs and lead to a faster path to financial freedom after graduation. Therefore, the Education Loan EMI Calculator can be used to determine the loan amount to avoid the pitfalls of overborrowing. You just need to input the loan amount, tenure and the interest rate offered to calculate the EMI instantly using an EMI calculator.

Ignoring Loan Tenure

Loan tenure determines the duration over which you will repay the loan. Understand the tenure options available and choose one that aligns with your repayment capacity. While longer tenures may offer lower monthly payments, they can increase overall costs. On the contrary, shorter tenures may lead to higher monthly payments but lower total interest payments. Assessing the loan tenure is crucial as it affects your monthly budgeting and long-term financial planning. It is crucial to balance manageable payments and minimise interest expenses.

Failing to Plan Repayment

Before taking an Education Loan, develop a clear repayment strategy. Consider your expected income after graduation, job prospects, and other financial obligations. Create a budget and repayment plan to ensure timely repayment and avoid defaulting on the loan. Planning repayment in advance is vital to avoid financial strain and maintain a good credit history, which is crucial for future financial needs.

Not Researching Moratorium Period

Many Education Loans come with a moratorium period, during which you are only required to pay the interest on the loan. Research the duration of the moratorium period offered by different lenders and factor it into your financial planning. Understanding the moratorium period is essential as it allows you to focus on your studies without the immediate burden of full loan repayment.

However, be mindful that interest continues to accrue during this time, potentially increasing the overall cost of the loan. Therefore, evaluating the length of the moratorium period and its implications on your finances can help you make informed decisions and better manage your loan obligations.

Conclusion

Deciding to pursue higher education often requires financial assistance and Education Loans from reputed institutions like ICICI Bank are a helping hand in bridging the gap between aspirations and affordability. However, the decision to take such a loan demands proper planning. By avoiding the mistakes mentioned above, students can get through the Education Loan process effectively.

Moreover, it is important to have a detailed awareness of loan types, interest rates, margin money and repayment strategies. This paves the way for better education and financial freedom.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)