Defaulting on a loan not only effects your credit score but also your loan and credit eligibility. It reduces your chance of getting loans in the future.
Along with medical costs, the education cost in India has been on the rise over the years, both for secondary education and higher education. People generally take a loan to finance it. However, maintaining a loan is not always easy. For instance, similar to other types of loans, defaulting on an education loan ruins your credit score. The credit score effect is not only limited to the student, but even the parent or guarantor, who also gets affected. Defaulting on a loan not only effects an individual’s credit score, but also the loan and credit eligibility. Hence, the borrower’s chances of availing loans in the future also get reduced. According to experts, while facing difficulty while paying the EMIs, one can opt for other options such as rescheduling education loan, transferring balance or changing the lender.
Here are some of the measures to help you prevent a default on the loan;
- Change lender/ Transfering balance – As the name suggests, you can switch from your current lender to another financial institution, or even consider transferring the balance. This should be opted for if you are getting a lower interest rate on your education loan. Also, if you have an unsecured loan, you can even convert that existing education loan into a secured loan, with which your EMI and the interest outgo will come down.
The new lender before allowing balance transfer will take into account your track record of repayment history. Hence, make sure that you don’t delay or miss any payment. You might also be needed to pay additional charges, while transferring the balance or changing lenders, such as documentation charge, service charges, and processing fee of which could be around 2 per cent of the transferred loan amount.
- Rescheduling the Loan – You can reschedule your education loan, wherein you can extend the time of the loan. You need to apply for it to your bank or loan provider, and once they approve, you can get an extended tenure to pay off the loan. However, with the extension of the tenure of the loan period, the total interest payout also goes up. Hence, with the increased tenor of the education loan, the loan itself becomes more expensive. Few loan providers (NBFCs and banks) also levy an additional charge in form of a penalty for delay in payment and rescheduling of the loan.
- Deferring the Payment – It is generally offered with all education loan, wherein you get to pause the outgo of your EMIs for a few months or years. Also known as the EMI holiday, if you are not offered this upfront, you can request their lenders to allow payment deferring. This could be opted for if you are expecting a lump sum in the near future. You can also opt for this if you want to stabilize your financial conditions. However, make sure to check with your bank, as many banks and financial institutes add charges and penalties on deferring payments.
- Step-up repayment plan – Normally, while opting for an education loan, the repayment period starts with bigger EMIs which subsequently decrease over the repayment tenure. With the step-up repayment plan, you get to pay smaller EMIs in the initial phase, which increases over-time. Experts say one should opt for this when one needs some time to increase one’s cash flow. Experts suggest borrowers who have recently got a job or are in the financial crisis should opt for this. It is also opted by borrowers when they want to raise their creditworthiness as a borrower so that their EMI outgoes are small.