The rising education cost and willingness amongst students to finance higher education independently without using parents’ savings are the two factors leading to an increase in the demand for a loan for education in India.

Before approaching any financial institution for a student loan, you must research various aspects. Hence, it is crucial to have a clear knowledge of these terms to understand the education loan process easily.

Key terms of education loans for students

Secured and Unsecured Loans: Secured loans are loans in which borrowers pledge some asset as collateral to the financial institution. When borrowers do not pledge any asset as collateral to financial institutions, such loans are termed as unsecured loans.

Now, you might think, what is collateral? So, here it is.

• Collateral – It is the asset that borrower mortgages to the financial institution for obtaining the education loan. Financial institutions require collateral (in the form of immovable property or liquid assets) as a security to recover their loan in case the borrower fails to repay. Residential property, life insurance and non-agricultural land are some of the acceptable forms of collateral.

EMI – Equated Monthly Instalment or EMI is one of the most effective methods of repaying education loans in an organised and steady manner. It is the fixed payment paid every month by the borrower and includes both the principal amount and education loan rate of interest.

• Principal amount – It is the basic loan amount granted by financial institutions to students. In other words, the principal amount is the original loan amount you receive from your lender.
• Interest rate – The interest rate is the money paid to the financial institution by a borrower for borrowing the principal amount.

Let’s understand these three terms with an example. For instance, if you take a student loan in India of INR 2,00,000 at 12% for 10 years, 2,00,000 is the principal amount, the interest rate is 12%, and INR 2869 will be your EMI. You can use Education Loan EMI Calculator to calculate your monthly EMIs.

Moratorium Period – It is a grace period granted to borrowers for not making any education loan EMI payment. But it is not an interest-free period; accrued interest is charged during the moratorium period.

• Accrued Interest – This interest is accrued from the first month after the sanctioning of the education loans for students. Hence, we advise our student fraternity to make small contributions in the form of simple interest/partial interest.

Top-up Loan – It is the loan provided on the existing education loan to students interested in pursuing further studies. Borrowers can take a top-up loan from the same financial institution they have taken a study loan.

Co-applicant – A co-applicant is a person that signs the education loan agreement with the main loan applicant. Also known as a co-signer, a co-applicant is liable to repay the education loan when the main applicant is unable to repay it. A parent, legal guardian, sibling or other blood relative can become your co-borrower.

Repayment period – It is the period when a borrower finally starts repaying the loan for education through EMIs. This period starts after the moratorium period.

Loan Margin – The loan margin is the amount of money paid by the borrower for financing their education. This amount excludes the loan amount offered by the financial institution. For instance, if you have applied for a loan of INR 1,00,000 and the lender sanctions INR 98,000 as a loan amount, then INR 2,000 is a loan margin, which you need to arrange. The loan margin is usually expressed in percentages. As per the aforementioned example, 2% is the loan margin.

Avanse Financial Services does not charge any margin money; we offer 100% education loans for students.

Credit score – A credit score is a number from 300 to 850, which represents a consumer’s creditworthiness. This score is generated after evaluating factors like credit history, repayment history, etc. It is the first thing financial institutions check for when you will apply for an education loan. The higher the score, the better would be the prospects of getting a loan.

Loan Sanction – After the submission of necessary documents by borrowers, the financial institution verifies the submitted records. Once they validate all the documents, the loan amount is sanctioned if you meet their preset criteria.

Disbursement – Post the loan sanction of the loan, the process of releasing the amount of education loan by financial institutions is referred to as loan disbursement. 

Recognised and reputed universities - Recognised institutes are affiliated with the Central/State universities and come under the All India Council on Technical Education (AICTE) or University Grants Commission (UGC). The reputed institutions have a history of outstanding work or service and are highly recommended. It is best to check with your lender if your preferred course/university is approved by them.

At Avanse Financial Services, we aim to make the education loan journey of students hassle-free. Hence we have explained some of the common education loan terminologies. Feel free to connect with us to know more about an education loan or education loan rate of interest.