Loan Terms Explained

Have you stepped in the race of studying abroad too? Well, congratulations! It’s one of the most
amazing and exciting experiences you’ll have in life. Now that the decision is made, let’s get to the basics! How do you plan to fund your education abroad? Is an education loan on your mind? That’s one of the most suitable options, allowing you to pursue your academic aspirations without financial hassle. You get substantial funds with a flexible repayment tenure, along with tax benefits from the Indian Government. However, do loan terms and jargon confuse you, leaving you searching for explanations? Well, Lorien Finance is here to help with loan terms explained, clarifying all the important terminologies you need to know when taking an education loan. Let’s get started!

Application Checklist

A predefined itemised list of documentation that the borrower needs to provide at the time of applying for a loan. This list is intended to cover most information needed to begin the underwriting/application process for most loan requests.

It typically includes financial, academic, and identification documents required by the lender to assess your eligibility.

APR (Annual Percentage Rate)

The annual percentage rate (APR) is the total yearly cost of taking out a loan. This rate includes the
interest rate, along with any other finance charges.

For example, when you apply for your education loan, you might have to pay loan origination fees or processing fees. If you only consider the loan’s interest rate, it would be lower because the overhead costs aren’t included.

Under the Truth in Lending Act, lenders must disclose the APR, so you have a complete understanding of how much it’ll cost to take out a loan.

Borrower

When you apply for an education loan and receive funds, you are the borrower. As the borrower, you’ll have to repay the loan according to the loan terms agreed upon.

If your father applies for an education loan to pay for your tuition fee and living expenses, then he
would be considered the borrower. In this case, the lender will hold your father responsible for loan
repayment.

Collateral

When you pledge a valuable asset (tangible or intangible) as security for your loan, it is considered to be a collateral. Tangible assets that can be considered collateral include land, building, vehicle, gold, while intangible assets include intellectual property, such as patents, copyrights, trademarks, trade secrets, contracts, licenses, franchise agreements, leases, securities and bonds.

If the borrower stops repaying the loan, the lender can seize and sell the collateral to get their funds back.

Cosigner

A person who agrees to be equally responsible for the repayment of the loan if the borrower cannot repay it, is considered to be a cosigner or a co-borrower.

If you apply for a loan but do not have sufficient income or credit history, your father or brother (with sufficient income) can become your cosigner.

Cost of Education

Cost of Education includes the total amount a student needs including tuition fee, living expenses,
accommodation, books, transportation travel fare for foreign education.

While choosing your education loan lender, ensure if they cover 100% of the cost of your education, as some only cover a part of it.

Credit Score

A score that represents your creditworthiness, based on your borrowing and repayment history. This score is calculated by the lender on the basis of your payment history, current debt amount, credit history length, and new credit activity.

As per the FICO credit model, a good credit score is at least 670. With an excellent credit score, you
can secure an education loan at the best possible interest rate.

Credit Worthiness

Creditworthiness is the likelihood that you i.e. the borrower will repay your loan based on your
financial history, income, and credit score. Lenders evaluate you by your creditworthiness to determine your loan eligibility and ability to repay the loan.

Default

The inability to repay the loan according to the terms and conditions agreed upon at the time of loan approval, usually after several missed payments.

This can lead to serious financial consequences, including damage to credit and legal action.

Deferment Period

It is the time when you aren’t required to make any payments, usually when you are still studying or a few months after graduation.

Education Loan Disbursement

The process through which the ender transfers the loan amount directly to you or the institution you’re planning to study in.

EMI

The fixed monthly payment to the lender to repay the loan, including both principal and interest. The Equated Monthly Instalment (EMI) payment begins once your moratorium period is over.

Fixed Interest Rate

When a loan has a fixed interest rate, the interest rate remains the same for the duration of the loan. Since the interest rate remains the same, the monthly payment doesn’t change. The predictable monthly payments make it easier for you to budget your loan payments.

Grace Period

The short duration upto 12 months after graduation during which the borrower does not have to start repaying the loan. This period allows the borrower to secure employment or make other necessary arrangements before starting the repayment.

Interest may or may not accrue during the grace period, depending on the loan terms.It’s usually
followed by the start of EMI payments.

Guarantor

In the case of student loans, a guarantor is a third party, whose assets are pledged to the lender as
security.

Hard Credit Check

When you apply for a loan, the lender will perform a hard credit check or inquiry. This credit inquiry
usually has a small impact on your credit score—your score may drop by up to four points. A hard
credit check remains on your credit report for two years.

Late Fee

A penalty charged by the lender to you on missing a scheduled loan payment. This fee is charged when you make the past due payment. The loan agreement states the amount of this late fee and when does your lender charge the same.

Loan Agreement

A formal contract between the lender and you, outlining the terms and conditions of the loan, including the loan amount, interest rate, repayment schedule, and consequences of default.

Loan Amortisation

The process of gradually paying off the loan through regular monthly instalments. These instalments include both the principal and the interest.

Loan Limit

Loan limit is the maximum amount of money a lender is willing to offer you. This limit is determined
by the lender on the basis of factors including your financial needs, the cost of education as well as
collateral.

Loan Margin

With some lenders, you are required to cover a part of your education cost yourself, and the remaining part is financed by the lender. This portion is termed as the loan margin.

Loan Tenure

The duration the borrower must repay the education loan. It is typically a few years after the
moratorium period ends. The loan tenure can vary depending on factors such as the loan amount,
interest rate, and request of the borrower.

Longer loan tenures result in lower monthly instalments but higher overall interest payments.

Loan Waiver

In case, the borrower has been unemployed for a cumulative total of five years after completing their program of study, they may be eligible for debt cancellation. They should back up their requests when applying for loans with legitimate explanations.

It depends completely on the lender to forgive a student loan.

Loan Write-Off

When a lender classifies a loan as uncollectible, they write-off the loan, removing it from their balance sheet. This happens when the lender believes in no realistic chance of loan recovery because of the borrower’s defaults.

A loan write-off doesn’t mean the lender won’t make any attempts to recover the debt.

MCLR (Marginal Cost of Funds Based Lending Rate)

The minimum interest rate that a lender can charge for a loan in India, determined on the lender’s cost of funds, operating costs, and other factors.

If you take an education loan from a bank whose MCLR is 7%, your loan interest rate might be MCLR +2%, making it a total of 9%.

Moratorium Period

From the moment the loan amount is sent to the your account until you have finished one year of your education or have completed 12 months after finding employment (whichever comes first), is referred to as the Moratorium Period.

When the Moratorium period expires, you must start making monthly EMI payments. Only the simple interest, which is considerably less than the EMI Amount, must be paid by you up to that point.

Non-recourse Loan

A non-recourse loan is simply a collateral loan where the lender’s recovery is limited to the collateral pledged for the loan.

In case you fail to repay your loan, the lender has the right to seize your collateral attached to the loan. However, the lender doesn’t have a right to seize any additional personal property.

Origination Fee

A fee charged by the lender to process a new loan. This fee covers the lender’s costs of underwriting, processing and administering your loan. It amounts to be a percentage of the loan amount and is often deducted from the final disbursement.

Prepayment/foreclosure Charges

If you pay off your loan partially or completely ahead of the scheduled loan terms, some lenders charge a penalty. It compensates the lender for the interest they lose when the loan is repaid early.

Pre-visa Disbursement

Pre-Visa Disbursement Loans prove as a way for students to secure their seat by making an initial
deposit or first-semester tuition fee payment to the university/college before Visa.

Note that the pre-visa disbursement depends on the norms of each country.

Principal

The actual loan amount, lenders give to borrowers, or the overall amount loaned out.

Post-visa Disbursement

Post-Visa Disbursement Loans are given once the student got the visa approval or actual visa stamping on Passport.

Note that the post-visa disbursement depends on the norms of each country.

Recourse Loans

A recourse loan is secured by collateral, where in case of loan default, the lender can seize the asset attached to the loan. In addition, they may be able to seize other personal assets if the asset attached to the original loan isn’t enough to satisfy the debt.

Repayment Schedule

It is a detailed document outlining the date when you start repayment, the amount of principal and interest paid with each EMI, the mode of payment, and the number of EMIs to be paid till the end of the loan tenure.

ROI

It is the rate at which the interest amount is calculated. It can be of two types – Fixed and Floating.

For fixed ROI, the EMIs amount is fixed as the interest rate agreed upon in the loan agreement does not change during the tenure of the loan.

For floating ROI, the amount of EMI is not pre-determined since ROI changes with the increase or
decrease in interest rates in the market.

Sanction Letter

An official document issued by the lender that confirms the approval of the education loan. It contains important details like the loan amount, interest rate, repayment period, and other terms and conditions.

The sanction letter is a legal agreement between the borrower and the lender.

Secured Loans

Secured student loans are educational loans that require some sort of collateral to be pledged as
security. Collateral can be in the form of tangible assets like property or intangible assets like fixed
deposits or stocks. The collateral serves as a guarantee to the lender that the loan will be repaid.

Soft Credit Check

Soft credit checks occur when you view your own credit, apply for a job or give a lender permission to do a quick review of your credit. A soft credit check has no impact on your credit score. Allowing a lender to perform a soft credit check is useful when prequalifying for a loan. By prequalifying, your lender can give you an estimate of what your loan’s APR and terms would be if you apply.

Tax Rebate

Education Loans taken from gazetted banks and financial institutions are eligible for deductions on the interest part of the education loan under Section 80E of the Income Tax Act of India, 1961. Deductions can be claimed for 8 consecutive years including the year in which the loan is taken in.

Any Indian individual can claim deductions on the interest part of the education loan availed for self, spouse, children or any other child of whom the individual is a legal guardian.

Unsecured Loans

Unsecured loans don't require you to pledge any security/collateral. So instead of relying on the
borrower's asset security, the financial institution provides the loan based on the borrower's
creditworthiness and a student's employability potential in case of an education financing solution.

And there you have it—a whirlwind tour through the jungle of loan-related terms! Whether you're
gearing up for your study abroad adventure or just trying to decode your financial future, understanding these terms is like having a secret map to navigate the world of loans.

Remember, loans don’t have to be a scary word; think of them as your trusty sidekick in the quest for your dreams. So, the next time someone throws around terms like “APR” or “collateral,” you’ll be ready to engage in a savvy conversation.

Got questions, need a bit of guidance, or just want to chat about your study abroad dreams? Don't
hesitate to reach out to us at Lorien Finance! We're here to help you navigate your financial journey
with ease and a sprinkle of fun. Let’s make your study abroad experience as smooth as possible—
because your dreams deserve it!

Connect with us today, and let’s turn those aspirations into reality!