Education loan plays a vital role when you decide to study abroad. In India, a lot of government banks offer up to INR 1.5 crore education loans. However, when you take a large amount it is very important to plan the entire repayment of the loan. Whenever you are choosing any course make sure that its job prospects are very good.
Repayment of your education loan in India will start after course completion + 1 year and if you missed any EMIs it will badly affect your credit score. Hence, it is very important to understand how defaulting on loans will get you in trouble and what prevention strategies you should take to avoid such circumstances. Let’s discuss in detail education loan default, its consequences and preventive measures.
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Education Loan Default
Education loan default occurs when a lender does not pay the EMI on the scheduled date. When you start the repayment of a student loan you keep a separate amount aside which will be deducted from the account as EMI. However, the ACH Mandate get bounced if you do not keep a sufficient balance in your account. As per the data from the Ministry of Finance from March 2021, around 9% of education loans issued by public sector banks in India turned out to be NPAs (Non-performing Assets) by the end of 2020. Around INR 8,587 crores were unpaid by the borrowers which were due from 366,260 loan accounts. Due to these reasons, banks are planning to curtail lending fearing student loan default.
Also Read: Education Loan Interest Rate
Education Loan Default: Major Causes
Education loan default can happen due to multiple reasons. Students may not get the desired job or the estimated salary package. This will impact their financial planning and may lead to non-payment of loan EMIs. Getting a job soon after completing the course is not guaranteed. Also, if you have already planned the repayment but some unforeseen circumstances appear then also there are chances of being a defaulter. However, some people knowingly default on their loans which compels the bank to take necessary action against them. Let’s understand some of the major reasons behind education loan default in India:
Delay in Salary
If you are working in the private sector it’s not necessary that you will get your salary on time. Your employer may delay in crediting your salary. This will result in the non-payment of EMI and it will get bounced due to insufficient funds. The bank will then charge additional interest and penalties over the EMI. Your credit history will also show the delays that you made during your repayment period, resulting in a drop in your score. To deal with this you need to plan properly the payment of EMIs in advance.
Also Read: Personal Loan Vs Education Loan
Loss of Job
A private sector company can never offer proper job security. Sometimes the company faces losses and aims to reduce the overall employee size. As a result of this, you may lose your job and face financial difficulties. There are many other reasons for job loss but the outcome is the same for all and that is you won’t be getting a salary until you find another job. In this phase, if you don’t have anything to back your finances you will default on your EMIs. This will increase your burden as multiple EMI bounces will attract a lot of penalties and interest and a severe drop in credit history.
Negative Results in Business
If you start a business after completing your education it’s not guaranteed that you will start making profits soon. There are chances that your business will suffer losses. This will increase your financial problems and you will be unable to repay your loan. The additional charges over non-payment of EMI will put more pressure on you and that’s also a major problem of mental stress.
Willful Default
Here comes the case of intentional crime. There are a lot of people who take the loan with the intention of not repaying it on time. Willful defaulters are those who do not repay the loans even after having the ability and resources to pay. However, once a wilful defaulter tag hits your Credit history it’s very difficult to overcome. You will not be getting loans, credit cards etc with such a low credit score. The Reserve Bank of India has set strict guidelines for the treatment of wilful defaulters.
Also Read: Education Loan Disbursement Process
Education Loan Default: Major Consequences
Student Loan default can have serious consequences which will create endless troubles for you. The bank may involve police and you may find yourself standing in a courtroom. When you delay your EMIs or stop paying them the bank starts treating your account as a Sub-Standard Asset (SSA) or Non-Performing Asset (NPA). The bank will visit your home and may proceed to recover its amount through the collateral that you pledged while getting the loan. Let’s focus on some major consequences of education loan default:
- Additional Charges: If your EMI get bounced the bank will charge additional interest and penalties. If you have a different lender presenting ECS/ACH in your bank then this will happen on both ends. For example, if you have taken a loan from Bajaj Finance and the standing instructions are in your SBI account then both of them will charge penalties separately.
- Impact on Credit Score/CIBIL: Your credit score will be severely affected in case of loan default. This will make it very difficult for you to borrow loans and credit cards in future with any bank or financial institution. Even if you pay your EMIs with a 7-10-day delay then also it will impact the score. Your credit report will show the overall delay that you made in paying EMIs to a particular lender.
- Losing Ownership of Collateral: If you will stop repaying your EMIs the bank will start the process of loan closure through a lump sum payment or recovery of collateral. In that case, you may lose the costly asset that you pledged to the bank at the time of taking the loan. You cannot even claim it back on the promise of repaying the loan. Once an asset is owned by the bank they will sell it immediately to recover the loan amount and you must know already that pledged collateral is always above the value of the loan.
Prevention Strategies for Student Loan Default
Making the entire repayment of the education loan on time is always the best way to manage your finances and to be free of any burden. The timely repayment of loans will boost your credit score and the lenders will understand that you are a less-risky borrower. The chances of getting higher loans will also increase with that. Check some of the smart preventive strategies that will help you to make timely payments of EMIs:
- Proper Financial Planning: You must plan your entire repayment of your education loan properly. Always try to save money for emergencies like job loss or salary delay. It is a good habit to keep your account funded with an amount that is sufficient for up to 3 EMIs. Now even if your salary is delayed or you become jobless all of a sudden your repayment will not be hampered.
- Settlement with Bank: In case you are facing severe financial problems you can discuss with your bank to provide an additional moratorium period so that you can repay the loan properly. During this period you can keep paying interest charged by the bank. This will not hamper your credit history as the bank is allowing you a repayment holiday.
- Loan Refinancing: If you have taken an education loan with floating interest rates it may hamper your financial planning. As the interest rate keeps fluctuating with inflation, it may get higher and you will find it difficult to pay properly. In that case, you must contact other lenders for refinancing or loan transfer so that you can get a better deal.
- Early Repayment: It is always suggested that if you have an extra amount pay it towards the principal of your loan. This will reduce the overall loan cost and you will be able to close your loan early. This will be very helpful for you as you will be able to plan your next goal in future such as a house or a fancy car.
FAQs
Defaulting on repayment of education loans has serious consequences. Your credit score will be badly affected and you can also lose your ownership over the pledged asset.
In case of non-payment of an education loan, the bank will send you legal notice. If you still do not make the payment the bank is legally obliged to take over your pledged asset and sell it. However, in most of the cases, arrest doesn’t happen. The bank finds a way to get a loan settled through Lok Adalat etc.
Usually, education loans in India are not forgiven especially if you are taking it from private banks or NBFCs.
Non-payment of EMIs towards education loans has serious consequences. Always plan properly for loan repayment and enjoy a risk and hassle-free financial environment.
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