Education loans are becoming increasingly popular among students who plan to study abroad. Getting an education loan depends upon various factors like university, the country, your ability to repay etc. It is very important to plan the repayment of an education loan properly to avoid a financial crunch in the initial days of your career. If you are getting a chance to foreclose the loan then that’s even better. Let’s understand some of the major benefits of early repayment of educational loans.
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Reducing the DTI (Debt-to-Income Ratio)
DTI or debt-to-income ratio is one of the primary factors which is considered when you apply for a loan. DTI shows your ability to take on more debts and your ability to repay. For example, if you earn INR 1 lakh per month and you pay INR 30,000 for EMIs then your DTI is 30%. Similarly, if you are paying INR 50,000 for EMIs then the DTI will be 50%. A person having a DTI of 50% or more is considered a risky borrower. So, if you start repaying your loan early and the amount is more than the stated EMI then it will reduce your DTI and you can plan for other goals.
Also Read: How to get Tax Exemption from Education Loan
No Prepayment Charges
Unlike other loans, education loans generally do not have a foreclosure or prepayment charge. When you take a loan from a bank or any NBFC there is a fixed tenure of repayment. If you decide to close the loan before that period then the lender charges around 3-4% plus taxes on the principal amount. When you repay your education loan there will be no extra charges and you just pay the principal amount. However, this is the case only when you repay your education loan within the moratorium period. After that, you need to pay the accrued interest on the principal amount.
Better Financial Control
When you have a debt to pay every month against your loan it keeps making you worried about that. Every month you are supposed to keep that amount separate in order to pay your EMIs. By doing this you are not keeping a full hold on your personal finances and the lender is making you worry about that. Hence, if you get a chance to repay your education loan prematurely then it shall be done. This will provide you full control over your personal finances and you will be able to manage it in a better way.
Note: Interest paid on the education loan qualifies as a deduction under section 80-E of the tax laws in India. There is no deduction on the principal amount and the deduction on interest can be claimed only when the loan is active. It is advised to calculate the benefits of foreclosing the loan against letting it run.
Also Read: Type of Education Loans for Indian Students
FAQs
Yes. You can request your lender to cancel the loan remaining loan. However, you may be asked to pay the applicable charges for the cancellation of the loan. It’s better to understand all such terms and conditions at the time of applying for a loan.
Under section 80E of the Income Tax Act, you can claim deductions for the interest paid on an education loan. No deductions can be claimed on the principal amount.
Paying an education loan early comes with a lot of benefits. You won’t be paying any foreclosure charges and it will create a good impact on your credit score.
Repaying loans needs to be planned well in order to avoid financial issues. An early repayment will reduce your DTI and you will be able to set other goals. When you are paying EMIs it keeps you disturbing and controlling your finances as you are required to keep aside a certain amount every month. Hence, repayment of an education loan is a good option to make your finances run smoothly.
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