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How do banks calculate Interest on

Education Loan in India?
May 22, 2017

How do banks calculate Interest on Education Loan in India? In India, interest

calculation of education loan is done in two parts. If you keep paying your interest
from the very first month, then the interest would be calculated as Simple Interest,
unlike other loans, wherein you pay compound interest from day 1 with no choice.
However, if you do not pay your interest every month, then the interest would be
calculated as Compounded Interest. So, choice is yours, would like to pay
interest less or more?

Lets Calculate Interest:

Part 1:

During moratorium period, Simple Interest is calculated on the amount which you
have already taken for your fees. Remember, in school maths, there use to be a
formula for simple interest? Right, the same one, that is

SI=(PxRxT)/100;
 where, SI=Simple Interest

P=Principal Amount

R=Rate of Interest, here it would be per annum always T=Time, here it would be in

days always

Therefore, now the formula will be

SI=(PxRxT)36500

Now, lets say, your education loan amount is Rs.4.00 lakhs. Loan tenure is
15 years after moratorium period. And, your course duration is 4 years. It means
your moratorium period will be 4 years + 12 months, which is equal to 5 years or 60
months, in case of your unemployment after course completion. If you have secured
employment, in that case, your moratorium period will be 4 years + 6 months after
securing job, which makes a total of 4.6 years or 54 months.

Now, for instance, on Nov 04, 2016 you have requested for Rs. 1.00 lakh for your
1st semester fees. Once this amount gets debited from your loan account on Nov
04, 2016, you will be start charging simple interest on this Rs. 1.00 lakh from 4th
day of Nov 2016. Lets calculate Interest now. As per formula,

P=Rs.100000.00

R=9.35+1.50=10.85% per annum (Please check the latest Rate of Interest from the

Bank) T=27 Days i.e. from Nov 4, 2016 to Nov 30, 2016

That means, the Simple Interest which you need to pay on Dec 1, 2016, is

SI=(10000010.8527)36600 = Rs.800.00,

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 Note: Here, instead of 365 Days, 366 Days are taken for calculation, because, 2016
is a leap year.

If you do not pay this interest amount on Dec 1, 2016, then Dec 1, 2016 onward,
your principal amount would become Rs.100800.00, and interest for Dec 206
will be calculated on this principal.
Now, you have requested your 2nd semester fees on Apr 4, 2017. The amount of
the fees is Rs.1.00 lakhs.

How, the Interest will be calculated this time, lets see.

If you keep paying your monthly interest every month, in that case your principal
amount should remain same, that is Rs.1.00 lakh, and we will assume the same so
that you can understand the calculation better.
Previous outstanding of Rs.1.00 lakh and, new outstanding of Rs.1.00 lakhs, so
total principal amount will be Rs.2.00 lakhs. Now, as per formula,

P=Rs.200000.00 R=10.85% pa

T=27 Days

Therefore, SI=(20000010.8527)/36500 = Rs.1605.00

During your moratorium period, calculation of SI will done in the same way. This was
the one part of the calculation. Now, lets proceed to the 2nd part.

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 Part 2:

Once your repayment starts, that is the repayment of 1st EMI, then, interest will
be compounded annually. Lets see how?

Lets say, when your repayment starts, your outstanding is Rs.4.00 lakhs, as you
kept repaying interest in every month during your moratorium period. On this
principal, compound interest will be calculated for 15 years @ 10.85% pa to convert
the total amount of Principal & Interest both, into monthly EMI, which is a fixed
amount and cant be changed. So, now the amount which you will be paying as EMI
every month, will be calculated using below mentioned formula:

Amount = P 1 +R/100 ^n
where, P=Principal amount, that is the total

outstanding R=Rate of Interest, here its 10.85%

pa

n=Loan Tenure, here its 15 years

So, the calculation of EMI will be somewhat like

this:

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various Loans, Creditability,Loan related Insurance. http://www.moneymaya.in
Moneymaya.in is a Personal Finance Blogging site where you can find & share information about
various Loans, Creditability,Loan related Insurance. http://www.moneymaya.in
 Hence, your EMI for next 180 months or 15 years is Rs.4508.80. And, this
calculation is valid only, if you are simultaneously repaying your monthly interest
during moratorium period. If you want, you can always consider prepayment option.
In case of PSU Banks there is no charge for prepayment, however, Private sector
banks charge some extra amount for prepayment. So, this

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 option varies bank to bank. There are many apps available for EMI
Calculation, so you can always calculate Interest before you plan for any loan.

One very important thing which I would love to discuss here. And, thats the tax
benefit on the interest amount of your education loan under Section 80(E) of Income
Tax Act . Repayment of monthly interest is mandate to avail this benefit. And, this
is the best strategy to repay your student loan on time.

I have tried to explain this complicated calculation in most simple way. Please, comment below
to add to the topic or for any queries.

Consequences of Loan Default like

Education Loan or any Loan?
You may have serious consequences of loan default, even if its unsecured. And,
even if its an
Education Loan or any other loan for that matter. If you default on your loan,
whether its an Education Loan, Home Loan or any loan for that matter. It will
appear on your CIBIL Report or credit report. Check the terms & conditions and
other details before you sign off on a loan agreement. Of course, if you
have money lying around, it does beg the question as to why youre not making
repayments!

If you do not put in any effort to negotiate or settle a debt and it gets written off,
then, you are ruining your CIBIL report indefinitely. That means that default will
remain on your CIBIL report

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various Loans, Creditability,Loan related Insurance. http://www.moneymaya.in
 forever. However, if you try and settle the debt through recovery teams or
Credit recovery camps, then defaults or partial defaults are removed from your
credit report after three years.

Consequences of Loan Default:

Social Reputation is at risk:

Banks or financial institutions may keep coming to your residential address

for recovery of default loan amount or the complete loan amount. When they come
your residence, they may talk to your neighbours about you. Also, they call on the
telephone numbers on which you call frequently for the recovery. It definitely affects
your image among your family, friends, relatives and colleagues.

Difficulties in Employment :

If you are already in a job and you default on your loan. In that case, your bank
or financial institution may follow you to your office as well for the recovery of your
default loan amount or complete loan amount in some cases. As a result, your good
will, name and fame everything may get ruined.

In other scenario, if you are looking for a job, in that case, your potential employer
cannot check your credit report or CIBIL Report. However, they may request you to
show it. Some companies

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 have strict policies against hiring people who have defaulted before. This may be
taken as a sign of irresponsible behavior. In some industries, such as finance, loan
default may affect your job badly because it could be considered that how would
people trust a financial advisor with a long list of defaults.

Having Money Seized from Your Accounts:

If you have money in the lending bank, they may be able to take it and use it
towards repaying your debt. However, it depends on the bank in question and the
terms and conditions involved.

Legal Proceedings:

On the basis of the contract that you signed for a loan, you are legally obliged to
pay back your debts. If you do not repay you loan, your bank or financial
institution may initiate legal proceedings against you. You will usually
receive the first legal warning if you have not made repayment in more than 30
days.

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 No Access to Crucial Loans:
If you do not repay your loans on time, any kind of loan for that matter, this loan
default of yours will reflect in your CIBIL report. A poor CIBIL score or credit score
will make it difficult to obtain crucial loans, such as a home loan or education loan
or business loan, etc. You may deprived of important financial requirements or
opportunities. For instance, people unable to get a home loan are often forced to
rent. This is a significant waste of money, as they are unable to own a home to rent
out or resell. Those unable to get education loans may struggle to find better job
opportunities, or obtain promotions.

Looking for Loan Forgiveness?

So, if youre in loan default, start taking action immediately and make sure to
create a plan of action. Ignoring your student loans or any other loan for that
matter, wont make them go away.

There are options those can help you get out of loan default. Loan consolidation is
one of those. It lets you to consolidate your loans into a new single loan with a fixed
interest rate. However, options vary from bank to bank or one financial institution to
another. So, you need to research

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various Loans, Creditability,Loan related Insurance. http://www.moneymaya.in
 these options as per your bank or financial institution and work with your lenders to
figure out what you can do to get out of default because there are no ways to skip
them at all.

In short, getting your debt written off may seem like a good thing in the short term, the
real costs are rarely worth it
!!!

Instead read this to find out the Best Strategy to repay your Education Loan and its

benefits. Also read : Central Sector Scheme of Scholarship for College and University

Students

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various Loans, Creditability,Loan related Insurance. http://www.moneymaya.in