Students access credit for various reasons, including financing college education and meeting other personal expenses. Credit can lighten the financial load on parents by spreading the cost burden over a longer period. Regular repayment of loans will help you to establish a good credit profile. However, irregular repayments may make it difficult for you to access credit in the future.
GETTING AN EDUCATION LOAN IS EASY
Most banks offer education loans at low interest rates, as prescribed by the Reserve Bank of India. As students, you would be the primary applicant. Typically, an education loan of up to . 4 lakh only requires a parent or guardian to co-sign the agreement; for loans ranging from . 4 lakh to . 7.5 lakh, banks may require you to provide co-obligation of parents together with a suitable thirdparty guarantee.
While for loans above . 7.5 lakh, banks require co-obligation from parents, tangible collateral security and the assignment of your future income.
REPAYMENT
Education loan repayment starts six or 12 months after course completion or after gaining employment, whichever is earlier. The course term is a moratorium, when only the simple interest on the amount disbursed is payable. Let's take the example of Rahul.
Rahul's father was happy to pay the interest during the moratorium. While at college, Rahul applied for a 'free' credit card. However, he did not realise that the only 'free' aspect to the card was the waiver of the joining fees. A credit card can be very expensive form of credit, if a balance is outstanding for some time or the balance is not paid in full and on time, every month.
Rahul only paid the minimum amount due on his credit card each month and saw his outstanding balance increase, to the extent that once he had graduated, his outstanding balance was more than half his annual income from his first job in a large IT company.
Initially, Rahul paid his education loan and credit card repayments monthly and on time, but when he went to the US for a two year project, he let this discipline slip and began to default on his obligations.
He thought that this wouldn't matter too much as he would pay off his debts once he had saved enough money from his stint abroad. Rahul returned from the US six months ago and settled the accumulated and long overdue balance on his credit card and education loan.
He wanted a larger place to stay and with the remaining money saved from his stint in the US, he could afford the down payment but needed a home loan for the balance amount to purchase a property.
To his dismay, the bank refused the loan request based on his credit report, which showed the irregularity in repayments, even though he had no outstanding balance.
He wished he had taken more care about his earlier credit commitments and has vowed to re-establish his credit history by taking out small credit commitments and repaying these on time, thus enhancing his chance of buying his dream home in the future.
HELP IS AT HAND
In case your family income from all sources is less than . 4.5 lakh, you can obtain an income certificate from the state's issuing authority and get a subsidy on the entire interest during the moratorium. In case you find it difficult to get a job, you should promptly alert the bank about the situation. In most cases, banks will take note of your troubles and may extend the moratorium to two years.
CREDIT HISTORY
Banks and NBFCs provide a record of your loan and credit card repayments to credit information companies (CIC) such as Experian. A CIC is an independent organisation that compiles public data, identifies information, credit transactions and payment histories of consumers.
When you apply for a loan, banks have to make sure that you are who you say you are and that you are likely to repay the loan. They will look at the information in your application and will check your credit report from a CIC.
If your report shows that you repay credit on time, this will usually help you get credit at favourable terms.
Thus, it is important to maintain a good credit history.
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