An education loan default can not only ruin the credit score of the student, but of the parent or guarantor as well; adversely affecting their loan and credit eligibility.
An education loan default can not only ruin the credit score of the student, but of the parent or guarantor as well; adversely affecting their loan and credit eligibility, and reducing their chances of availing loans in future on favourable terms. You can avoid such situations by taking a few necessary measures.
Here are some ways that can help you prevent a default on the loan and save you from its negative consequences:
Rescheduling the Debt
If your financial condition is weak and you are facing difficulty to keep up with the EMIs, you can request the lender to reschedule your education loan. By doing so, you get an extended tenure to pay off the loan. But do keep in mind, when you increase the tenor of the education loan, your total interest payout goes up and hence your loan becomes more expensive. In addition, your bank or NBFC may also levy penalty or charges for delaying payment and rescheduling the loan.
Transfer balance or change lender
You can also consider transferring balance or switching lender that offers lower interest rate on education loan.
Moreover, if your existing education loan is an unsecured loan, you may consider converting it into a secured loan. This way, your EMI, as well as interest outgo, will be lessened. Before opting for blanace transfer, ensure that you don’t delay or miss any payment, as lender generally takes into account 12 months track record of your repayment history before allowing balance transfer. In addition, you also have to pay additional charges, such as charge, documentation charge, and other service charges, where processing fee could go as high as 2% of the transferred loan amount.
Ask for income-driven repayment plan (Step-up plan)
Normally when you repay your education loan, you have to pay bigger EMIs first, which gradually decrease over the repayment tenure. However, when you choose a step-up repayment plan, bank allows you to pay smaller EMIs in the initial phase, which would increase over the tenure, offering you enough time to increase your cash flow.
This option is ideal for those who have just got a job or are on the verge of loan default. Since you have smaller EMIs to pay, it also helps you to raise your credit worthiness as a borrower. In addition, you can enjoy tax deductions throughout the repayment period, which further reduces the cost of an education loan.
Deferring the Payment
Deferring the payment allows you to avail EMI holiday by pausing the outgo of EMIs for a few months. You can request your bank to allow payment deferring if you are expecting a lump sum or financial windfall in the near future. You may also use this brief pause to stabilize your financial conditions by increasing the cash flow. However, make sure to check all charges and penalties, as the lender might levy charges to defer payments.
If none of these options work and you fail to service the EMIs for 3 months, the lender will send you a notice to pay off the loan within 60 days and also report the default to credit bureaus. Hence, make sure that you pay your EMIs on time and keep penalties at bay. In case you find trouble in repaying dues, get in touch with your lender and inform them about your financial condition. If your problem is genuine, the lender may help you repay the loan, by easing the terms on the loan.
(By Gaurav Aggarwal, Associate Director-Unsecured Loans, Paisabazaar.com)