I had borrowed 2.2L of education loan to fund my engineering course. While signing the documents, I asked Bank Manager the necessary questions we usually tend to ask. What will be the tenure? When do I start repaying? What will the interest be? When the manager said I can take upto 1 year (moratorium period) after my education to start repaying my loan. It felt like a good deal.
I took approximately 45k in the first year and the subsequent years as and when I had to pay my fees. I even borrowed some amount to buy my laptop. I graduated in the month of May and joined my company in the month of October. However, I knew I could still take a few months to complete the moratorium period and chose to enjoy my first few salaries on myself before starting to repay my loan.
After a couple of months, I went to the bank and asked manager how much should I pay every month. He said I can pay 7.5k every month. 7.5k every month was quite comfortable with my salary. I paid every month without fail.
After paying EMI of 7.5k every month for 2 years (~1.8L), I thought I have now paid a good amount of my loan. I might not be owing a lot to the bank considering interest as I have already repaid 2.25L. So, I go to the bank and ask for the loan statement.
To my shock, my loan statement read that I still owe 2L to the bank. I did not understand. I felt there was definitely a mistake. If I have borrowed 2.2L and I repaid 1.8L already, how on earth do I still owe 2L to the bank? That is when I tried to understand how the loan works and how it is designed to extract more money from us. Afterall, that is how they earn.
Mistake 1: We do not understand how loan repayment structure works. To know how it works, I have written a dedicated blog for it and how it can be repaid faster. Click here for the blog. In simple when I paid 7.5k in the first month, approximately 3k of the EMI was eaten up by that particular month’s interest alone. The rest 4.5k was used to reduce the principle.
Mistake 2: We take moratorium period for granted. We do not realize that the bank charges interest right from the time they dispatch the first installment. In my case, I was charged interest for the first 40k paid in the first year. Interest was charged for the entire 4 years not only on the 40k but also on the interest accumulated on that 45k every month. In the second year, interest would be charged on first years 45k, interest accumulated on it, another 45k (fee for second year), and interest that gets accumulated on the total every month.
Mistake 3: We pay only the amount we are asked to pay. It is ideal to repay as much as possible in the beginning of the tenure. As explained previously, most part of our EMI goes into the interest part. Hence, the principle doesn’t reduce much. So, if you can afford to pay more whenever possible, that will help you in reducing the outstanding principle faster.
Mistake 4: Borrowing more money that you need. You may be eligible to take 5L of loan when you would need just 3L. I was offered higher amount of loan from private lenders. They sold it by telling I would need it to pay my hostel fees or buying laptop or to go on an international trip from college. It gets very enticing and difficult to not take the loan. Honestly, it feels like free money that we only need to pay after 4 years but that’s the biggest mistake we can get into. Banks lure you so that they can disburse higher amount. We like to take it coz we don’t need to repay it asap. Imagine exorbitant amount of interest getting accumulated on these extra money for 4 years.
Mistake 5: Not negotiating hard. We usually go to one bank (preferably to the one where we know someone), talk to the manager and get the loan. It is important to talk to a few banks and check which banks can offer you the best interest rate. Some banks give discounts for girl students and some banks offer lower interest rate on premier education institutions. Do your research on these and negotiate hard with the managers to reduce the interest rates.
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