Education loan is a tricky some business as it is a cumulative effect of the Student who is seeking the loan, the parents who are standing as guarantors as well as the security the parents are ready to provide to avail the loan. Lets look at what should be your criteria’s for education loan
- Understanding Loan Product Paper
There are over 50 financial institutions that are providing education loan. Each of them has unique advantages and disadvantages. We need to look at the education loan that most suits our need in terms of financial cost and other parameters
- Understanding Financial cost
Every education loan has three main financial costs.
- An upfront fees which is charges by the bank also known as the processing fees. The same varies from financial institution. There are financial institutions who charge a processing fees and look to adjust the same with the first disbursal. The same is however non refundable in case the loan does not get approved or the student fails to take the disbursal. Generally Banks have low processing fees averages approximately INR 10,000 which may or may not be refundable. The Non Banking Financial Institutions who are providing education loan or loan for education purpose generally charge higher processing fees with maximum of 1% -1.5% of the loan value. You can attribute this cost to the level of service the financial institution is providing in terms of dedicated relationship manager, door to door service etc
- There is a cost associated with getting the loan processed. This generally consists of Legal fees, valuation fees ,Key man Insurance and Stamp Duty charges etc. The legal fees is the fees the banks charge for legal verification of the property you are looking to mortgage. Generally these charges are fixed and range from INR 4000 to INR 8000. The second cost involved is the Valuation fees that are charged by the bank to get the valuation done on the property that you are providing for the collateral. This again is a standardized fees and ranges from INR 4000 to INR 8000. The third cost is sometimes optional or mandatory depends on the type of loan and ranges differently between banks and Non banking financial institutions. Key man insurance is nothing but life insurance taken by the bank for the student. It’s a one time premium which is paid by the student to avoid any kind of financial burden on the parents or guarantors incase the student looses his life. It’s a very sad probability but I guess financial institutions are looking to prepare for any eventuality. Some banks also incentivize the student to take up the insurance policy thereby reducing the rate of interest by 0.25% or 0.5%. All banks would insist that the property would be registered equitable mortgage to the bank. Here
- The third and the most important is the interest charged for the loan by the financial service providers. As well it’s a complete farce that the interest rates are fixed. All financial institutions, which are regulated by RBI, have been asked to estimate an interest rate based on the MCLR. An MCLR is a rate internally determined by a financial institution which signifies its cost for acquiring the fund. Its like interest paid on savings account, fixed deposits etc plus the administrative cost of the bank to determine the cost of acquisition of the money. The same money is lent to the student and you would see that the sanction letter has MCLR + X % +premium/discount etc. The X% is what the financial institution is making to fund the student. Generally, Banks interest rate for education loans ranges from 9.5% to 10.5%. For Non Banking Finance corporations its slightly higher at say 10% to 13% depending on the security of the loan.
- Understanding Co-signor/Co Guarantor requirements –
Most educational loan providers require you to have a valid guarantor. They generally insist for the following qualities in the co-signor
- Clean CIBIL Score – They would want a high CIBIL score closer to 800. In some cases I have seen applications even getting rejected in case the applicants guarantor has no CIBIL score, which means that he has never taken a loan. So its imperative that some credit history is mandatory and it may be in the form of credit card payments
- Free Income – The loan providers look at concept of free income. They look at the income of the person less his obligations. Obligations could be in the form of existing loans, insurance policy or any other liability. They generally want the income to have remained stable for the last 3 years and hence insist for last 3 years IT. They also look at remaining years of service or income. We have had cases which have got rejected when the co-signor has less years of service income
- Father/ Mother or blood relative – Most of the loan providers insist that the guarantor should be either father/mother or real brother or sister. They are generally not comfortable with guarantees from next relative such as Mamaji, Tayaji or Chachaji or Cousin Brother/Sister
- Should be accessible – They would want the guarantor to be accessible where in they would be able to easily get in touch with the guarantor. Cases where the parents are NRI eg working in the Gulf are not encouraged. Its tough to get the case approved when co-signor is hard to contact
- No Political or Police recommended – Loan providers should be able to exert pressure on the co-signor in case there is default or delay of the payment. They generally discourage having politically connected co-signors who they know cannot be influenced to recover the money.
- Understanding Collateral Requirements
Students should understand the requirements of the bank with regard to mortgage of property. They generally insist on the following
- Free Incumbent property – The property provided to the bank should be free from any lien. The property should not be mortgaged to another bank. In case the property is mortgaged then it is advisable to approach the same bank for the loan. In case properties are priory mortgaged its also important for you to have a No due certificate from the bank.
- Property papers to be legally registered – The property papers need to be registered from the first document onwards. All financial institution would insist on the property papers being registered. In case the same is not there on older property sale we would request you to immediately approach the registration center. Generally you are required to pay additional stamp duty charges and get the property registered
- Property should not be jointed or part of other property – In case you have two adjoining flats where in you have broken the wall in the middle, the bank would insist on getting both mortgaged even if one has the value to cover for your education. So in case one is already mortgaged and you are looking at the second adjoining one the same could create issues during the processing of your loan.
- Property should have OC (Occupation Certificate) – Occupation certificate is a document issued by the municipal corporation of the area signifying the completion of the proposed building as per the initial approval provided by the municipal authority. It signifies that the building construction is legal. This is an issue with many old buildings where the property was constructed and the builder failed to obtain an OC due to illegal or over construction.
- Property should be in the name of Immediate Parents- In case the property is in the name of extended family such as grand parents or uncles the same need to be put on the loan papers as guarantors. You would also be required to address the issue of lineage and property claim. Generally the bank insist to get a No objection undertaking from other stake holders during the loan in order to provide the loan on the same property.
- Property should not have any claim or inheritance issues – There should not be any dispute on the property going on in the court. In case we have a scenario like in a 3 floor building (Typically in North India) the ground floor is under dispute or has no OC there are high chances the financial institution would have issue in processing the loan for a property on the second or third floor due to uncertainty of the decision on floor one.
- NOC from Society – You would be required to have a NO Objection Certificate you’re your Society as well as would be required to have a lien marked on the share certificate issued by the society. The society would also be intimated after the property has been mortgaged to inform them that the property is in custody of the Bank.
- Registered Mortgage and Stamp Duty – All financial institutions would insist that the property would be registered mortgage. There is an expense of Stamp duty, which gets associated by a registered mortgage. The Stamp duty is generally in the range of 0.2% to 0.3% of the loan value.
- Understanding Disbursal Amount –
The criteria for the amount required for the final disbursal is determined by factors such as student profile, guarantor profile, I20 or College requirements and Value of property. Generally it’s a combination of a few factors and then the lowest value is arrived from the permutation and combination
- Student Profile – IN an Unsecured loan ie NON collateral or with out mortgage the financial institutions generally base the final amount on the country of study, College of admission, Course of admission and the GRE score. The general ranges from INR 25 Lakhs to INR 40 Lakhs with minor exceptions. In the current scenario students going for MS in USA for stem courses are getting maximum amount of unsecured loan up to 40 Lakhs. In this case the financial institution is banking on the future earning potential for the student post the completion of the course.
- Guarantor Profile – Some financial institutions base the amount on the earnings of the co-signor. The calculation is the free amount the parents can spare to repay the loan as EMI multiplied by the tenor to determine the final amount. Taking the family income less the liability payments we arrive at the free amount per month.
- I20 or college requirements – The financial institutions look to provide the students amount based on the actual requirement as stated by the college. The same covers the Tuition fees as well as living expenses. Incidental expenses such as Air tickets, laptops may or may not be covered. Generally all institutions provide up to 100% of I20 value. In case they do not provide the complete value the remaining is called Margin Money. Margin money is the requirement for Self Funding by the bank. All financial Institutions would insist that the availability of margin money be shown at the time of sanction as well as the same is provided in every disbursal. So in case a bank funds you 90% of the Value of your requirement, so for every INR 90 they disburse they would insist you deposit the remaining INR 10 into there account and then they remit the complete INR 100 to the University.
- Value of Property
Banks generally ascertain the maximum eligibility for the loan by seeing the valuation report provided by the valuer. The valuer provides the registered value, the market value as well as the depressed value. The Registered value is the value ascertained by the ready reckoner rate provided by the local municipal corporation. The same is used to pay Stamp duty on the property. The general value taken is the market value of the property. The same is arrived by the last sold property in the area adjusting for differences related to quality of Building Construction, age of the property , amenities provided etc. Generally the banks or financial institutions provide upto 100% of the property value.
- Understanding Disbursal Timelines
- The financial institutions follow the timeframe provided by the college. Some insist on getting documents verifying the schedule of the payments. There could also be a possibility on the financial institution providing you with reimbursements. In such cases you are requested to first ascertain the norms required for disbursal.
- We have seen that the universities abroad only raise the request for payment