How to get education loan with bad credit?

Education is very important for each and every person. With good education comes good job opportunities. It is every parent’s dream is to give their child the best education that they can provide to give them the best future possible. Sometimes it might not be possible for parents to provide the kind of education they want for their kids. This is where education loans come in which can be availed by parents or the ward with the parent as co-signor to pay for the child’s education.

Since the student for whom the loan is intended will not have a credit history and credit score as they would not have taken any loan or credit, the parents credit score will be taken into consideration as they are the co-signor. So, if the parent has low credit score then the child getting the loan is difficult.

Recent studies show that the number of defaults on education loans have started to increase which is leading more and more Non-Performing Assets(NPA) for banks. The reason for these defaults are

1. The EMIs are high that they are not able to pay

2. Parents who are the co-borrowers of the loan do not pay the loan

The above mentioned-issues faced by the students are due to high amount of fees in lower rated colleges and getting placed in low income jobs. Parents are at the end of their careers and cannot afford to pay the loan amount. These issues have led banks to make the approval process for education loans a little stringent.

How does credit score affect my education loan application?

However, a bank may market itself, it still likes reliable borrowers. They want people or organizations who will pay their due month on month and on time. To know if you are that person they will check your credit report and credit score.

Credit report contains the parent’s credit history –

• Have you taken loans before?
• How did you go about completing it?
• Did you miss any payments?
• Are there any bad remarks on your report?
• Do you have any other credit account active?

With so much information already available about you on your credit report banks will determine how dependable you are and decide on your loan plan.

Factors That affect your credit score

• Payment history – The most important factor. How regular you are on your loan payments
• Amounts owed – Having very high debts or maxing out credit cards with dues continuing for many months will have a negative impact on your score
• Length of credit history – The longer the credit history, the higher the credit score
• Credit mix – With different types of loans available (credit cards, car loan, personal loans etc.). needs a debt to determine your score
• New credit – Taking out credits within short time increases your credit risk

How to improve credit score

If you have any unpaid dues or have “settled” or “written off” statements on your credit report it is best to pay them off and get the “closed” statements against these accounts. This will improve your score immediately.

Many lenders nowadays provide score building credit. It can be a personal loan or a credit card. These products are either short term or don’t give big benefits or risk for the lender. These products help the individual with no credit score get on the score board which will help when they really need credit for an important reason.

A person can also go for secured credit where you will need to pledge a collateral like fixed deposit to acquire the product. For example, a person can go for a secured credit card where they can post a collateral in the form of a Fixed Deposit of Rs.1,00,000. Now there are 3 advantages for the customer. The first is that the bank will pay interest on the fixed deposit. The second is that the customer will be able to get a credit card with all the benefits and lower interest rate available to the card when you can get it without any collateral. You will only have a credit limit of Rs.60,000 as card issuers only allow 60% to 70% of the collateral as credit limit. But the overall advantage a person gets from secured credit card is high.

Do not make multiple applications for loans or credit cards within a short period of time. Many people think they are maximizing their chances of being approved for a loan by applying to several lenders, or by applying for multiple products (house loan, auto loan or personal loan) with one or two lenders. Each time you apply for new credit, potential lenders make an enquiry. Too many enquiries within a short time frame can cause a drop in your credit score as it signifies that you are ‘hungry’ for credit.

How to get best deal on education loan?

Once you improve your credit score you can follow these steps to reduce your education loan cost.

1. Before going for an education loan compute how much funds you have. That is how much money you are putting in and if you can get any aide or scholarship from the university. Try all these options before deciding on the loan amount you need.

2. Check if the universities you have applied to have ant MoU or tie ups with any financial institution of NBFC. If so apply with them as the loan process will be very fast.

3. Check out all the details of the institution – placement history, average salary and earning potential after completion of course. Don’t just focus on the rank of your college or the course it offers.

4. Once the loan amount has been decided, choose the best terms for you. Compare multiple banks with regard to rate of interest and tenure. Apart from this know what the loan covers, i.e. does it only apply for tuition or does it compare the whole stay as well as other requirements.

5. Check if your parent’s income will suffice to meet the eligibility criteria for your loan. If not be prepared with a co-borrower or collateral (house, FD, non-agricultural land etc.) to pledge to negotiate a better deal with your chosen bank.

6. Once the loan amount and bank has been finalized, next comes the part of repayment. You need to decide how you want to repay the loan. That is what type – Simple interest, EMI or moratorium. Simple interest payments will reduce the burden on you after graduation as part of you loan will be paid by your parents. Try and avoid moratorium as the burden after graduation will be high.

7. Keep all the documents required ready. This where most of the loans get rejected even though the borrowers are eligible for the loan. Know what are the documents that are required before hand and keep them ready. Do not wait until the bank asks for it.

8. Know all the details of your loan – Repayment period, when the loan repayment will actually start, when the interest will start to accrue etc. This is to make sure you are diligent and have all the details before signing on the dotted line.