Education Loan

How to Foreclose Your Education Loan?

How to Foreclose Your Education Loan?

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Read the blog on education loan foreclosure to know how you can take the decision to foreclose your education loan. Read about its benefits, drawbacks, impact on credit score, and its process.

Education loan Student loan Loan without collateral Loan with collateral
GyanDhan
Rohit Gidwani
Updated on:  23 Feb 2024  | Reviewed By: 
Aman 
| 751 | 8  min read

Education loans, also known as student loans, are the best financial resource that can help you pursue studies, whether in India or abroad. According to RBI, the outstanding portfolio under education loans grew by 17% to INR 96,847 crores in FY23, compared to INR 82,723 crores in the previous year? Predictions suggest that this figure will likely increase manifold in the coming years.

 

Gone are the days when taking a loan was considered a lifelong burden. Opting for an education loan, especially when studying abroad and requiring around 50 Lakh INR or more, is a wise decision. However, it does not end with taking the loan; repayment is crucial. This can be done as per the agreed schedule with the lender or by choosing to foreclose the loan before the scheduled time. Yes, it's possible, and in this blog, we will guide you through every aspect of foreclosure of education loan answering questions like “Can I repay education loan early?” and more.

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Abroad Education Loan Overview

Before we start learning about the foreclosure of education loan, let’s have a quick look at some of the prominent lenders that can help you get an education loan abroad.

Lender Name Maximum Loan Amount Rate of Interest

SBI

Up to 1.5 Cr INR

10.15% - 10.65% (males)

10.65% - 11.15% (females)

UBI

Up to 1.5 Cr INR

9.25% - 9.75%

Axis Bank

Up to 75 Lakh INR

9.90% - 11.50%

ICICI Bank

Up to 1.5 Cr INR

9.50% - 11.25%

IDFC FIRST Bank

Up to 70 Lakhs INR

9.75% - 12.25% 

HDFC Credila

Up to 60 Lakhs INR

10.50% - 12.25%

Auxilo

Up to 50 Lakhs INR

10.50% - 12.75%

Incred

Up to 50 Lakhs INR

10.50% - 12.95%

Avanse

Up to 50 Lakhs INR

10.50% - 13.50%

MPOWER Financing

Up to 100,000 USD

12.99% - 15.99%

Prodigy Finance

Up to 100% cost to study

12% - 14%

 

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Interest rate as of January 2024

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What is a Foreclosure of Education Loan?

Education loan foreclosure is the early repayment of the outstanding loan amount before the agreed-upon tenure. It involves making a lump-sum payment, settling both the principal and accrued interest. Borrowers opt for foreclosure to gain financial flexibility, save on interest, or due to personal circumstances. More benefits we will discuss later in this blog. However, it's crucial to understand the terms and potential penalties associated with foreclosure (if any), as these can vary among lending institutions. Reviewing the loan agreement and consulting with the lender is advisable before proceeding with foreclosure of education loan.

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Pros and Cons of Foreclosure of Education Loan

Foreclosure of education loan has its benefits and drawbacks. These are the factors one should consider when deciding whether to foreclose their education loan or not. Below is a table that represents both aspects of education loan foreclosure.

Pros Cons

Save Payment on Interest*:

Foreclosing your education loan allows you to save significantly on interest payments, freeing up financial resources for other priorities and future investments.

No Tax Benefits:

Foreclosing an education loan may result in the loss of potential tax benefits (under section 80e) that are typically associated with interest payments on education loans. Consider this carefully as it can affect your financial planning and tax liabilities significantly.

No More Financial Liability:

By opting for foreclosure of education loan, you eliminate the ongoing financial burden associated with monthly repayments, providing financial freedom and flexibility for future endeavors.

Prepayment Penalty:

Some banks, particularly in the case of unsecured education loans, may impose a prepayment penalty. This fee is applicable if you choose to foreclose the loan within a specific period, typically between 6 to 12 months from the date the repayment period began. It's crucial to be aware of such penalties before deciding on foreclosure.

Mortgage Freed:

Foreclosure of education loan releases any mortgage or collateral associated with the loan, giving you ownership and control over your assets sooner than the scheduled tenure.

Impact on Liquidity:

Opting for foreclosure of education loan involves a substantial lump-sum payment, which might negatively affect your liquidity. Consider the impact on your overall financial situation before choosing to foreclose, ensuring that you maintain a healthy cash flow for other essential expenses and financial goals.

Make Return Yielding Investments:

With the burden of the education loan over, you can redirect funds towards investments that yield returns, contributing to long-term financial growth and stability.

 

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*Example of saving interest payment - The education loan, totaling INR 23,00,000 with an interest rate of 10.55% for 10 years, carried a monthly EMI of INR 31,099. After 6 years, the outstanding balance was INR 12,13,518, with INR 11,52,680 paid in interest. Opting for foreclosure at this point would result in savings of INR 2,79,257, calculated as the difference between the total interest payable (INR 14,31,937) and interest paid till the 6th year. This underlines the potential financial benefits of choosing foreclosure of education loan.

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Impact of Foreclosure of education loan on Credit Score

Foreclosing an education loan can have a positive impact on your credit score as it demonstrates financial responsibility and the ability to fulfill obligations. Successfully closing a loan reflects positively on your credit history, showcasing your capacity to manage debt. This positive influence is often more pronounced if the loan has been consistently paid on time, contributing to a favorable credit profile.
 

Foreclosing your education loan, especially if it has been long, may have a slight negative effect on your credit score. The length of your credit history contributes to your score, and shutting down an older loan account can slightly reduce the average age of your credit, impacting the a little. Your credit score considers the duration of active loan payments. 
 

Opting for foreclosure shortens this period, affecting your credit history. By paying off your loan in one go, you provide a smaller dataset for future lenders to evaluate your repayment behavior. However, when you weigh both these aspects, the positive impact outweighs the slight negatives and when this decision of foreclosure is taken strategically then the negative impact can be eliminated.
 

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What is the Procedure for Education Loan Foreclosure?

The process of foreclosure of education loan is pretty simple. All you need to do is follow the below-mentioned steps - 

  • list items Visit lender: Make a trip to your lender to initiate the education loan closure process. Connect with a representative who can guide you through the necessary steps.
  • list items Check the loan balance amount: Verify the outstanding balance on your education loan. This information is crucial for making the decision about foreclosing.
  • list items Fill up loan closure request form: Complete the designated loan closure request form provided by the lender. Ensure that all required details are accurately filled in to facilitate a smooth process.
  • list items Wait for lender confirmation: After submitting the closure request, patiently await confirmation from the bank. The bank will review your application and provide the necessary approvals with a total outstanding amount calculation one last time.
  • list items Pay outstanding balance: Clear the outstanding balance by making the payment through a cheque, ECS (Electronic Clearing Service), or any other method accepted by the lender. 
  • list items Get the NOC (No Objection Certificate): Once the payment is confirmed, obtain an NOC from your bank also known as an education loan closure letter. This document signifies the successful closure of your education loan account. Keep it for your records as proof of loan closure.

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Foreclosure of education loan is a decision that you should take after weighing several factors that have been shared in this blog. Now that you have knowledge about education loan foreclosure you will be able to make a wise decision based on your needs. The way we were able to make your foreclosure of education loan journey simple, we can also make your abroad education loan journey. We at GyanDhan can suggest the best lender after evaluating your particular needs and making the whole loan application process hassle-free. Additionally, we won’t charge a rupee from you. All you have to do is check your education loan eligibility with us. 

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Frequently Asked Questions

What is the foreclosure of education loan?

Foreclosure of education loan involves the early repayment of the outstanding loan amount before the agreed-upon tenure. It allows borrowers to settle their loans ahead of schedule, typically saving on interest payments.

What happens if I foreclose my loan?

Foreclosing your loan means paying off the entire outstanding amount before the scheduled term, leading to interest savings. Check for any foreclosure charges, and once paid, your loan account is closed.

Are there any prepayment penalties involved with the foreclosure of education loan?

In general, RBI has asked lenders not to charge any prepayment penalty from the borrower in the case of education loans. There may be a few lenders that can charge the same in case you decide to foreclose the same after 6-12 months of the repayment period. 

How does foreclosure of education loan impact credit scores?

Foreclosing an education loan can have both positive and negative effects on credit scores. While it reflects responsible financial management, closing an older account may slightly impact the average age of credit.

Can I repay education loan early?

Yes, you can repay education loan early then the defined repayment schedule. This will help you to save money on the interest pain at the end of your loan tenure. 

What are the benefits of foreclosure of education loan?

Foreclosure of education loan offers benefits such as significant savings on interest, financial freedom from ongoing repayments, and the release of associated mortgages or collateral.

What is the difference between repayment and foreclosure?

Repayment refers to the regular scheduled payments made to settle a loan over its term. Foreclosure, on the other hand, involves paying off the entire outstanding loan amount before the scheduled term, typically resulting in interest savings but may incur additional charges. It is an early full repayment of the loan.

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