MBA Education is an expensive affair and funding it is an equally challenging task to secure a seat in one of the top MBA Institutes of India. When it comes to funding MBA education, be it in India or abroad, education loans are the most preferred and accessible option to manage the finances required for pursuing higher degree. But, like any other loan offering, borrowing money always has risks associated with it. And MBA education loans are no different. There are many risks involved even in an MBA education loan, which can come to haunt you during your MBA course period or after that.
Therefore, to ensure that you pick the right education loan scheme and understand all the terms and conditions that go along with it, you can follow this 10 step guide given below:
What might go wrong with your MBA education loan?
An MBA education loan like any other loan is a debt that students can take up in order to fund their management education at premier B-schools like IIMs or other private MBA Institutes in India. However, because you are borrowing money from a bank or other non-banking financial institutions, you have to pay the interest on the loan amount. In case, terms of the loan agreement are not clear or not understood by you in advance, they can often become difficult to manage.
An MBA education loan has a moratorium period, interest rate, repayment terms and many other aspects that can often cause a lot of trouble to the students after the completion of the MBA course. In case the student is unable to repay the loan in time or misses out on an EMI there is a risk of other charges and penalties being added to the loan amount? This can often lead to a trap in which students often find themselves.
Therefore, to avoid such problems later on, it is better if you opt for an MBA Education loan which can help you meet all the needs without being a liability in the future. The below given 10 step guide will help you do so, easily.
1. Compare different Loan schemes
Today, many government and private banks along with a host of non-banking financial institutions offer education loans for MBA education. The terms and conditions on which MBA education loans are offered differ from one scheme to another. This is one to ensure a wide port-folio of education loans through which loans can be extended to different students as per their needs.
Therefore, before finalizing the bank or the lender from whom you would be taking the education loan to fund your MBA, you must gather all information about all the loan schemes available to you. Once you have information for different loan schemes, you can easily compare them and find out the one that is best suited to your needs.
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2. No margin money
The majority of lenders who offer education loan have designed their own matrix of top MBA Colleges in India and the courses they offer. Depending upon this matrix, the banks / NBFCs decide whether they can fund the entire MBA education, including tuition fee as well as other addition expenses or not.
If not, these banks would fund MBA education of a student partially and ask the borrower to arrange the margin money for the rest of the amount. However, this is not a norm and can be negotiated upon. There are many public sector banks and even some private banks that do not ask for margin amount on MBA education loan. As a borrower, you must always go for the education loan offer which doesn’t require you to arrange any margin money.
The majority of banks or lenders who deal in education loan, already have terms about margin money pre-decided and the same are available online on their website. Therefore, students seeking MBA education loan can check these and pick the best available option.
3. No Loan Processing Fee
This one is pretty obvious. The majority of banks and NBFCs charge a nominal processing fee to process loan. And education loans for MBA courses are not an exception. The processing fee for an MBA education loan may differ from one bank to another; while some banks choose to charge in terms of percentage (in the range of 0.5% to 2%) of the loan amount many other levy a flat charge of around Rs 5000 or so. But, these charges are negotiable and can be waived off by the bank through negotiations. In fact, many public sector banks do not charge processing fee at all. And for deserving candidates, even private banks and NBFCs are known to waive off the processing fee for MBA education loans. You must always try and negotiate your way around processing fee.
4. Evaluate Interest Rate Structure
Education loan for MBA course is a debt that you take up and you have to pay interest as a price for the borrowing. Every bank decides a base-rate on the basis of which they lend money to the borrowers. The final rate of interest for your MBA education loan is decided on the basis of the base rate. The final rate of interest can either be above or below the base rate depending upon the policy of the bank or the lender.
Generally, banks are known to declare interest rates for education loans as Base Rate + Additional Rate of Interest. For instance, if the base rate for education loans is decided at 9.25% by the bank and the bank scheme mentions interest rate to be base rate 0.25% above the base rate, the final rate of interest would be 9.50%. Before applying for MBA education loan, you should check the base rate of the particular bank and then add the rate mentioned by the bank. Many students often get confused about the base rate equation which is used to arrive at the final rate of interest and are in for a shock later on.
5. Interest during Moratorium Period
Generally, education loans are provided with the grant of a moratorium period during which the borrower doesn’t have to pay back the loan amount. Simply speaking, a students taking up MBA education loan will not have to repay the loan during the moratorium period. But just because you do not have to repay the loan during this period doesn’t mean that the bank will not charge you interest for it.
Mostly, the moratorium period includes the MBA course duration plus the grace period granted by the bank before the repayment of loan begins. However, at times, either due to omission or ignorance, bank officials end up entering wrong moratorium period. Due to this, you will be charged compound interest even during moratorium period. Therefore, you must ensure that the moratorium period is clearly entered in the system and only simple interest is charged on the loan amount during it.
To check if they are being charged compound interest rate during the moratorium period, students can log on to their internet banking account or check the loan account statement which is provided by the bank.
6. Prefer Floating Interest Rate
Loans are extended to the borrowers by the banks at either a fixed interest rate or floating interest rate. Students should prefer opting for a floating interest rate as it can prove to be advantageous in the long run. A floating interest rate on MBA education loan means that the rate of interest rate will be revised on the basis of the changes in the base rate. This means, if the base rate is lowered, you effective rate of interest on education loan will also come down and vice versa. Therefore, students must always prefer an education loan that is offered on floating interest rate.
7. Repayment during the Moratorium Period
In case MBA aspirants are able to start the repayment of their MBA education loan during the moratorium period, they can negotiate with the banks for easing the rate of interest. Some banks are known to reduce the rate of interest by 0.25% to even 1% for MBA students who opt to repay the loan during the moratorium period. The lowering of interest rate can substantially lower the financial burden on the students as far as loan re-payment is concerned. Therefore, students must always try to begin repayment of loan early on, during the non-repayment period.
8. Use Work-Experience to your advantage
Work-experience can be a big asset when it comes to getting admission to a number of top MBA Colleges in India. But, did you know that you work-experience can also get you concession on the interest rate on your education loan? Yes, you read that right; MBA students who have work experience can negotiate a reduced interest rate, generally in the range of 0.25% to 0.50%. So, make sure that you use work experience to your advantage to secure favourable terms for the education loan.
9. Female candidates might get a better rate of interest
Top MBA colleges in India, especially the IIMs, are known to give promote gender diversity on their campuses by altering the terms of admission in the favour of female candidates. Similarly, a few of the banks or NBFCs also offer education loans for MBA courses on favourable terms to the female MBA aspirants. Female candidates who have secured admission to top MBA colleges can negotiate the rate of interest, moratorium period and other terms of the education loan with the lenders in their favour.
10. Repayment Term
As discussed above, the repayment term for an education loan begins at the end of the moratorium period. Generally, the repayment term can range from 1 year to 9 years, depending upon the loan amount and other terms and conditions of the loan product being offered.
As a general understanding, MBA students prefer lower repayment period to end the cycle of debt soon. But, students must realize that the interest paid for education loan is exempted under income tax; and therefore, a longer repayment term might prove to be more beneficial to you. On the other hand, many banks also reward lower repayment term with a lower interest rate. So, you will have to take a judgement call on the repayment term, after determining which option will be more beneficial in the long run.
Education Loans, especially for MBA education, have become a norm for students nowadays. But, it is also equally important to understand all the aspects related to education loan before and the aforementioned 10 step guide will help you do so. To get more interesting and informative articles about MBA education in India, please visit www.jagranjosh.com/mba.
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