Vinod applied for an education loan 2 years back as it was a viable option for him to study abroad. It was a means to achieve his dream of studying at a top university. However, 2 years later he realised that the rate of interest on his loan had also risen as the loan he took had come with a floating interest rate. Vinod talked to his friend about his situation and his friend suggested that Vinod should consider refinancing his education loan. Will education loan refinancing help Vinod in repaying his loan on time without breaking the bank?
A lot of students like Vinod opt for ‘education loan refinancing’ primarily to secure improved interest rates and favourable payment conditions. Keeping these things in mind, this blog has been written to make students understand what education loan refinancing is and how a student can apply for it.
Table of contents
- What is Education Loan Refinancing?
- Process of Applying for Education Loan Refinancing
- Things to Keep in Mind Before Applying for Education Loan Refinancing
- Things to Check While Applying for Education Loan Refinancing
What is Education Loan Refinancing?
Education loan refinancing is the process of taking a new loan from a lender in order to secure lower interest rates and other favourable conditions that are better than the ones available under the previous loan. Apart from lower interest rates, another major reason for loan refinancing is to get lower monthly payments. Lower monthly payments help in maintaining a favourable monthly budget while still making timely payments; also you get more time to pay off the complete loan.
Process of Applying for Education Loan Refinancing
The process for refinancing your education loan is quite simple. After you have checked your eligibility criteria you can apply for loan refinancing by following a few simple steps:
Submitting Loan Foreclosure Application
You will have to approach your current lender and ask for a loan foreclosure application. Fill out the application and submit it. When you are filling out the application, be very attentive and careful in reading the instructions and details.
Finding the Right Lender
Apply to refinance your existing education loan to a lender that offers you lower interest rates and other favourable terms. You will have to search through different lenders and go with the one whose interest rate is the lowest and other conditions meet your requirements.
Submitting the Documents
You will have to submit a set of documents like the loan application form, documents provided by your previous lender containing the details of your loan, Aadhaar Card & PAN Card, Proof of your residential address, proof of income, bank account statements of co-borrower/guarantor, IT returns, statement of assets and liabilities of the parent/co-borrower etc.
Verification of Documents
Your new lender will verify these documents and start the process of paying the foreclosure amount to your previous lender and issue a cheque for the same. The process of verification and contacting your previous lender may take some time or a few weeks. So, maintain contact with your lender about the updates.
After the cheque is cleared, your previous lender will foreclose the loan. This process may also take a few days as your previous lender will verify the cheque and other details.
Clarifying Your Queries
Make sure you clarify all your queries with your new and existing lender during the entire process as this will give you a better understanding of the terms and conditions.
Things to Keep in Mind Before Applying for Education Loan Refinancing
Though education loan refinancing seems like a good way of paying back a loan, not everyone is eligible for this option. There are certain conditions that a lender verifies before approving this process. Below are the details about the same:
- Good credit score: Your credit score tells the lender your ability to pay back the loan. A credit score of 650 and above is generally considered a good credit score. Also, if your credit score is good, your chances of getting lower interest rates also increase.
- Comparing both the loans: Before you go for education loan refinancing, you must compare the favourable conditions offered by your new lender like EMIs and rate of interest to the conditions provided by your previous lender. You can also try negotiating with your new lender for better interest rates and EMI options. Doing this will certainly help you in choosing the best option.
- A lower debt-to-income ratio: A debt-to-income ratio indicates the level of debt you have. If you keep your debt-to-income ratio under 50%, your chances of getting the loan refinanced will increase. Your lender will definitely check your debt-to-income ratio, so make sure you keep it below 50% at all times.
- Having a steady income: Every lender checks how suited you are to pay back a loan. Having a job and maintaining a steady source of income increases your chances of getting your loan refinanced.
Things to Check While Applying for Education Loan Refinancing
It is very crucial that you understand the various details about the whole process of refinancing.
Below are some of the things you need to check:
- Details about your loan: You need to know details of the loan like whether it was a secured loan or an unsecured loan. A secured loan comes with collateral, and while refinancing your collateral passes from the previous lender to the new lender. However, if the loan is unsecured, you will have to submit a list of documents to your new lender and may have to provide collateral.
- Overall profit: When you opt for refinancing you may have to pay foreclosure charges to your previous lender and a processing fee to the new lender. So, calculate your overall gain or loss from this new arrangement. If you are still saving money on it and have lower interest rates, only then go for this option.
- Reading documents carefully: Always make sure that you read the loan transfer documents very carefully as these will determine your loan structure. Going through these documents will help you understand the various details about the change in interest rates, collateral, EMIs, etc.
The documents required for refinancing an education loan include:
– Loan application form
– Documents provided by your previous lender containing the details of your loan
– Aadhaar Card & PAN Card
– Proof of residence
– Proof of income
– Bank account statements of co-borrower/guarantor
– IT returns
– Statement of assets and liabilities of the parent/co-borrower
Yes, it is possible to save money if you secure lower interest rates on the new loan structure. In some cases, borrowers also change their loan from a ‘secured loan’ to an ‘unsecured loan’. This frees up the collateral that they might have submitted under the secured loan.
It is very important that you check and understand the loan transfer documents. Apart from this, ask your lender to explain to you the terms that will change, especially the new payment structure.
Loan refinancing when done in the early stages of the loan repayment process is a very viable option. It helps you in getting favourable terms like lower interest rates, lower monthly payments and more time to repay the loan. However, always do a cost-benefit analysis before making the final decision.
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