POINTS TO REMEMBER BEFORE APPLYING FOR A LOAN

The times are changing, and changing fast. The few years have witnessed a high increase in students aspiring for MBA and professional courses. The number of colleges offering these courses is also on the rise. With fees of these courses skyrocketing, students are queuing for educational loans from banks. Gone are the days when one had to run from pillar to post to borrow money to study. Now a variety of Instruments are available for pursuing higher studies.

Almost all nationalised banks offer educational loans to students for studies in India and abroad. Besides some private trusts are running study loan scheme, the terms and conditions of which vary from organisation to organisation. To garner students to avail educational loan nationalised and private banks have even started putting their posters in college campus and promote their schemes. This trend is catching on and one will see lot of students going in for educational loan once the awareness level increases.

 POINTS TO REMEMBER BEFORE APPLYING FOR A LOAN

 The tenure

A longer repayment tenure would mean more interest payments on your loan. Before you set out to complete the paperwork for a loan calculate the Equated Monthly Installments (EMI) to know how much you are expected to pay and whether you have the capacity to pay that in time.

 The Loan Costs

Never forget the fee charged for disbursing a loan to you. Some banks have a higher fees than others. You need to take care of this important component of loan disbursements.

 The Prepayment Dilemma

Many public sector banks do not charge you a penalty for prepayment of loans whereas many private banks ask for a penalty payment. Check this out upfront.

 The Fixed Interest Rate

You need to know well in advance that interest rates do not fluctuate. If they fluctuate the choice is yours. There are quite a few fixed interest rate loans and if you are worried about variable interest rates then the best option is to go for a fixed interest rate to avoid suprises.

 Monthly or Annual Repayments?

You need to check out the repayment burden on yourself and see if an annual payment suits you. If not then go for the monthly plan.

 Tax exemption on loans

One can claim a deduction of up to Rs. 40,000 on the amount paid out of the taxable income in the previous year. This is a comprehensive limit, and includes principal and interest, if any.

One can claim the deduction if you've taken a loan from a financial institution or an approved charitable institution to pursue full-time courses for graduate or post-graduate level studies in engineering (including architecture), medicine and management or a post-graduate course in applied sciences or pure sciences, including mathematics and statistics.

The deduction is allowed for the first assessment year relevant to the previous year when the assessee starts repaying the loan and for seven assessment years immediately following thereafter. In other words, the deduction is available for a maximum period of eight years from the first year of repayment. The deduction shall be allowed for the period of loan and interest repayment, if it is repaid in full before the end of the above period.

Note: This deduction cannot be claimed by parents who have taken loans for the higher education of their children.

The Relevant section/rule is Section 80E of the Income Tax Act.