9 Common Education Loan Terms You Need to Know

Education Loan Terms Commonly Used in India Banks

Looking for a study loan in India? Learn the commonly used education loan terms first.

Like other sectors and professions, the banking sector has its own set of jargon. This banking terminology may also trickle down to the documents and other content created for the masses such as the information on the bank’s website. If you are looking for an education loan, you may be wondering what loan disbursement is or what is a prepayment penalty. However, if you learn the terminology used for education loans, it will be easier for you to understand the terms and conditions for the loans, and also compare different loans.

Here is 9 common terms used by Indian Banks for education loans:

Collateral: This is a common term that may not be well understood in the context of education loans. Collateral is an asset – property, deposit, etc. – that the borrower gives to the lender as security. This means that if you cannot repay the loan, the lender will have ownership over the assets used as collateral by you.

Disbursement: This term is used to signify the release of the loan from the lender to the borrower. For instance, in the case of education loans, some banks state that, “The loan is disbursed directly to the educational institution.” This means that the loan amount will be released directly to the educational institution where the student is enrolled and not to the borrower’s account.

Margin: The margin, also referred to as margin money, is the amount that the borrower contributes to the overall amount required. The bank covers the rest. For instance, if the total amount needed is Rs. 20 lakh, and margin is 20%, then you will have to contribute Rs. 4 lakh. The bank will provide (the balance) Rs. 16 lakh.

Equated Monthly Instalments (EMIs): Perhaps the most common acronym but we still decided to cover it for more clarity. It is defined as the amount you have to repay every month to the lender. This combines both the principal loan amount and the interest owed. The interest amount is more during the initial years and the principal amount is less, while at the end of the tenure, the interest is negligible, if any, while the principal is substantial. This is done because the lending institutions prefer to get their income as early as possible from you. Also, the time value of money means they are able to recover some of the cost associated with lending funds by getting their dues as early as possible.

Foreclosure: If a borrower decides to completely pay off the loan before the end of the repayment period then it is called the foreclosure of the loan. Some banks do not charge money for foreclosing the education loans while others may levy a foreclosure fee for paying off the loan before its ending date.

Joint Borrower/Co-borrower: When two or more people apply for a loan together, they are called joint borrowers/co-borrowers of the loan. In the case of education loans, parents or guardians may be required to apply for the loan with the student, making them joint borrowers of the loan. For some education loans, it is mandatory for parents to sign up as co-borrowers to secure the loan so that they can repay the loan if the student is unable to do so.

Loan Maturity: This is the lifespan of an education loan within which it must be repaid by the borrower. Depending on the tenure of the loan, the date of loan maturity is set when the loan is sanctioned by the bank.

Moratorium: Moratorium, also known as repayment holiday, is a period during which loan repayment is deferred but interest accrues on the principal loan amount. For education loans, the moratorium period starts immediately following the loan disbursal, continues during the course for which the borrower has availed the loan, and ends 12 months after the course completion or 6 months after landing a job (whichever is earlier).

Prepayment Penalty/Fee/Charges: If a borrower decides to partially pay off the loan, over and above the EMI, before the end of the repayment period then it is called prepayment of the loan. Some banks charge money for making partial payments towards the loan which are labelled as prepayment charges / fees / penalty.

It is important to note here that these terms may also be widely used for interest subsidies on loans and other types of loans. Understanding these terms will help you comprehend loan-related information easily and also make informed decisions.

Now that you have a sound understanding of key terms used for education loans, you might feel ready to look at study loans suitable for you. Please check our education loans page, if you are interested. We have covered education loans offered by major Indian banks.