Know About Your Education Loan
Education loans are available with two options: Fixed Rate of Interest and Floating Rate of Interest. Most banks offer the floating rate option only.
Some banks that offer Study Loans
Andhra Bank
State Bank of India
Allahabad Bank
UCO Bank
Bank of India
Floating rate has revision cycles which differ from bank to bank. It can be a monthly, quarterly, half yearly or yearly reset option. When interest rates move higher you end up paying a higher amount of EMI, or else, the tenure of your loan gets extended.
Consider a few important points, and how these will affect you before you take an education loan:
1. When will the interest rate change?
Interest rates will changes at a fixed period of time and this is referred to, as the Review Date, and is specified when you sign the loan agreement. Typically, it happens every quarter or monthly.
2. How will the interest rate change?
Interest rate offered to you is based on a base rate. The bank will have a base rate which is the lender’s pre-selected internal rate. The base rate changes due to changes in the interest rates in the economy.
If interest rates in the economy rise, the base rate will rise. If interest rates in the economy fall, the base rate will drop. Different banks adopt different nomenclature to coin a word for this base rate.
3. By how much will the interest rate change?
You need to understand the technical aspect of this. There is a spread or margin on this base rate. The spread/ margin is the percentage added or subtracted from the base rate. This is meant to cover the lender’s administrative and other costs.
To the base rate, the bank will attach what is called a Spread.
Eg: Bank’s RPLR = 10.00%.
The interest rate offered to you for education loan is = RPLR – 1% = 9.00% it can also be It could also be = RPLR + 0.5%. = 10.50%
Depending on various factors, the bank will decide on the interest rate and if it is higher (premium) or lower (discount) than the base rate.