Education loan is one of the best options to fund your higher studies abroad. However, you must stay informed about various fees and charges associated with the loan. Bank and financial institutions apply charges such as interest rates, processing fees, margin money, part-period interest etc. Part-period interest in education loans is usually adjusted in the EMI but you can also pay it in advance to ease the upcoming financial burden. Let’s understand what is part period interest in an education loan, why and how the bank applies the same.
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What is Part Period Interest in an Education Loan?
Part-period interest in education loans refers to the interest charged by the bank or the lender for the period between loan disbursement and the date of commencement of the repayment schedule. In simpler terms, it is the interest accrued while the borrower is still in during a grace period or moratorium after graduation.
Even in the usual education loan and other types of loans which don’t have a moratorium period, the part payment interest is charged for a certain duration. For example, if the loan amount has been disbursed on the 15th of a month and the EMI will start from the 5th of another month, the bank will charge part period interest of 20-21 days.
Also Read: Check here all the details on Government Education Loan to Study in USA
Why Does Part Period Interest Matter?
Understanding part-period interest in education loans is important because it will give you a clear idea of how much extra amount you are supposed to pay along with the EMI. Check some of the major reasons why it is important to understand the importance of part-period interest in education loans:
Accurate Financial Planning
Ignoring part-period interest can lead to underestimating the total cost of borrowing. By accounting for this component, students can create more accurate financial plans and budgets. Also, if you have additional funds, you can start paying the part-period interest well in advance so that it can’t get accumulated over a period of time and added to the EMI. It will ultimately increase the EMI amount, increasing your financial burden.
Also Read: Are you aware of the consequences of not paying EMIs timely? Check here all about Education Loan Default
Long-term Financial Impact
Part-period interest adds to the overall loan burden. Being aware of this aspect allows borrowers to assess the long-term financial implications and strategise repayment accordingly. If you stay informed about how much extra amount the bank is charging and how your EMI will get higher due to part-period interest, then you will be able to figure out a strategy to manage the EMI.
Avoiding Surprises
Lack of awareness about part-period interest in education loans can result in financial surprises post-graduation. By staying informed, students can anticipate and prepare for upcoming expenses. It will increase your financial burden if all of a sudden you will see the schedule of charge and an increase in EMI amount.
How to Calculate Part Period Interest in Education Loan?
It is very easy to calculate part-period interest rates in education loans. If you already know the terms and conditions of your education loan like the details about the interest rate, disbursement date, moratorium, and the start date of the repayment period, you can easily calculate the amount of interest that you will pay. Check the steps below:
- Check the date on which the loan was disbursed to your educational institution. This marks the beginning of the part-period for which interest will accrue.
- The start date of the repayment period is important for calculating part-period interest. This date is defined in your loan agreement and marks when you are required to begin making regular loan payments.
- Find out the difference between the number of days between the loan disbursement date and the start date of the repayment period. This period represents the duration for which part-period interest will accrue.
- Use the following formula to calculate the part-period interest:
This represents the part period interest accrued over 120 days.
Here,
- Principal Amount: The initial amount of the loan disbursed to you (INR 500000)
- Part-Period Interest Rate: The interest rate applicable during the part-period. This rate may differ from the standard interest rate and should be specified in your loan agreement (0.08%)
- Number of Days: The number of days in the part-period (120 days)
- 365: The total number of days in a year.
Tips for Managing Part Period Interest Effectively
Managing part period interest in education loans is important for effective financial planning. Check some of the tips below for managing your part period interest payment:
- Understand the terms and conditions of your education loan and the details about part-period interest.
- Consider part-period interest in your budgeting process and set aside funds to cover the accrued interest so that you can be financially prepared when repayment begins.
- Some lenders offer flexible repayment options which allow the borrowers to start repaying part-period interest while still in school.
- If your loan includes a moratorium after graduation then you should use this time to start repaying part-period interest voluntarily.
- Keep track of the interest accruing on your loan during the part-period phase. Regularly reviewing your loan statements can help you stay informed about your financial obligations.
FAQs
Part-period interest refers to the interest accrued on an education loan during specific periods, such as the time between loan disbursement and the start of repayment or during a grace period after graduation. It is calculated based on the outstanding loan amount during this interim period.
Part-period interest is calculated using a simple interest formula based on the principal loan amount, the part-period interest rate, and the number of days in the part-period.
Part-period interest begins accruing from the date the loan funds are disbursed to the borrower or the educational institution. It continues to accrue until the start of the repayment period or the end of any grace period specified in the loan agreement.
Yes, borrowers have the option to pay off part-period interest early if they wish to do so. Some lenders may offer flexible repayment options that allow borrowers to make voluntary payments toward part-period interest, which can help reduce the overall interest burden over time.
Part-period interest adds to the total loan repayment amount, increasing the overall cost of borrowing. It is essential for borrowers to factor in part-period interest when planning their finances and budgeting for loan repayment to ensure they can manage their financial obligations effectively.
Part-period interest is an important aspect of education loans that every student studying abroad should understand. By understanding its implications and implementing effective financial management strategies, students can make their loan journey easy and minimize the long-term financial impact.
To know more about education loans, 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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