In the recent year, a dramatic increase in education loans to study abroad was observed in the country. Due to the flexibility in terms and conditions, education loans are easily accessible to students. However, before taking an education loan you must plan the repayment of the loan on time. It is not necessary that you will get a job immediately after finishing your degree. In this situation, it will be difficult for you to repay the loan which will result in a negative impact. Read on to know more about how SIPs can help you repay the education loan easily.
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Education Loan Repayment
The most important factor which you should consider while repaying the education loan is timely EMI payments. Any delay in EMI payment results in a negative impact on credit score and additional penalties. However, in unprecedented situations like job loss, financial crisis etc you may miss or delay your EMI payments. In this case, you can choose education loan restructuring or if the interest rate is high then you can apply for education loan refinance. Apart from these traditional methods, early loan repayment through SIP (systematic investment plan). Sounds unique but complex? Let’s understand the process in detail.
Also Read: Are you aware of all the factors in loan repayment? Check here some of the common FAQs on education loan repayment
Education Loan Repayment through SIPs
It can be one of the most efficient strategies if you repay your education loan through the SIP. When you start investing in mutual funds through SIP mode, you can create a corpus that can be used to repay the education loan early. Let us understand this through an example.
Anand decided to study at a university in the USA. He took an education loan of INR 30 lakhs for a period of 10 years at an 11% interest rate per annum. The EMI that he will be required to pay will be INR 41,325 monthly. Now, if Anand decides to foreclose the loan i.e. repay the education loan before the stated duration, here is how the SIP will help him to do the same:
Anand will foreclose the loan so that he can save the money which he is paying against interest because there are no early repayment charges on education loan. However, paying a huge amount at one time is difficult, he started investing some money regularly in mutual funds through monthly SIP. As it is a good SIP plan, Anand knows that he will earn a higher return after certain years which will be more than the interest he is paying against the loan. This will help him to get a corpus. Anand will start investing around 10% of his EMI i.e. INR 4,132.50 and the expected return of SIP is 15%. In this way, the total SIP amount will exceed the balance loan amount after 7-8 years and he will save the interest amount which he was supposed to pay for 2 more years.
Why Should You Repay Education Loan Early?
Early repayment of education loans will help you to save a good amount of money which you were supposed to pay against the interest rate. For example, your total loan repayment period is 15 years and you foreclosed the loan after 8 years as you got some additional funds from SIP or mutual funds. Hence, you saved the money which you were supposed to pay against the interest rate for 7 more years. Check more benefits below:
- As there are no early repayment charges on education loans, you won’t have to pay any additional cost to close the loan early
- It will be a potential saving as you don’t have to pay interest rates for the remaining period, thus making your loan cheaper
- By closing the ongoing education loan, you will be able to plan loans and advances for another major life goal such as a car or a home loan.
Also Read: Planning to avail a loan transfer to a private bank? Check all about IDFC First Bank education loan transfer
Important Guidelines on Mutual Funds and SIP
While early repayment of education loans is efficient financial planning, you should always be careful about what plans you’re making to do the same. Using SIPs to repay education loans early is a good option but it also comes with market risks. Check some major guidelines for using SIPs to repay education loans:
- At the time of opening a SIP, consult a financial advisor to choose the right plan with the minimal risk associated
- Check the history of the SIP fund you are choosing and go through the review. You can do this by checking its all-time high and low history, maximum return, fund size etc.
- Mutual funds and SIPs are subject to market risks and can result in losses as well. Always read the fund-related terms and conditions properly before starting the investment
- Never choose a high-risk SIP or mutual fund by getting attracted to the high-profit margin
FAQs
In order to make early repayment of your education loan, you need to start investing in SIPs on a monthly basis. If you choose a good plan with a higher return, then you will save enough money after certain years by which you will be able to pay the education loan before your tenure ends.
Mutual funds and SIPs are subject to market risks. However, with the right plan and long-term investment strategy, you can start SIP. Always consult a financial advisor before choosing the plan.
Research properly among the various types of funds in the market. Seek advice from a professional and then choose a SIP plan.
It is good to foreclose the education loan early so that you can save money which you are paying against the interest. Also, you will be able to plan your future goals without existing financial burden.
No, there are no additional charges for making early repayment of an education loan.
Using SIPs to repay the education loan early is a good financial strategy. Always consult a market professional or financial advisor before starting the investment.
To know more about the repayment process, loan application process, the best bank accounts for students, forex and banking experience for global students or international money transfers, reach out to our experts at 1800572126 to help ease your study abroad experience.
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