An education loan will likely be your first time paying off a loan, and if you go about it right, it can be a great way to build your CIBIL score. But given how loan-averse our country is, loans will always come with many questions - one of which is about your student loan repayment.
Some people are lucky enough to secure a high-paying job. It’ll become a tempting idea to repay your loan in full - after all, debt can feel like a burden on your shoulders, something you want to get rid of quickly. In most cases, full repayment of your student loan through a one-time settlement isn’t the best idea - it could negatively impact your credit score.
Now banks do offer a one-time settlement. However, this is a last-case scenario offered to defaulters who cannot repay the loan - when all their warnings and notices are ignored. The debtor is then offered the option to repay the loan at a lower value so that the bank can regain some of that amount. But the major disadvantage of this is that your loan will be considered an NPA (a non-performing asset) and will turn your credit report into a red flag - making it difficult to get a loan.
The terms and rules of your loan repayment will defer from bank to bank. We recommend thoroughly reading through it before you sign the loan.
This is why loan repayment will look different from bank to bank. If you choose to repay more every month, banks will only charge interest on the remaining amount - thereby reducing the tenure of your loan. Some banks have zero penalties on prepayment.
Other banks, however, will simply term it as an advance payment for your upcoming EMI. Certain banks and lenders will even charge prepayment penalties. Look at it this way - your salary will increase with time, decreasing the portion of your income used to pay off your loan. It also increases your ability to pay a higher EMI. So if you want to make higher repayments, sign on for an education loan with a bank that doesn’t penalise early repayments.
If you’re early in loan repayment and if it’s a long-term loan, it makes sense to repay it in full.
That deduction in your credit score will likely be years worth of loan interest amount you’ll save. But ensure you note your current credit score and ensure it’s in a good enough range where a drop of a few points won’t put it in the danger zone.
However, reconsider your request for full repayment if your loan amount is high. Paying off your EMIs regularly helps you build your CIBIL score.
There’s a reason the rich take on debt - because utilising good debt helps you build long-term wealth. That extra money you want to use to pay it off can instead be put in a high-performing asset. This asset will provide you with a higher return than the interest you’re paying on your student loan. You can also save on your income tax when accounting for the yearly interest paid that year.
Remember, debt shouldn’t have to be scary - when well utilised, builds good financial health.
You can get an instant loan directly to your Savings Account through the Fi Money app. These are pre-approved personal loans made available to select users with good credit scores. On Fi, this process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our licensed partner bank assigns an eligible loan amount to each user (up to ₹5 lakh).
Frequently Asked Questions-
While repayment terms differ slightly, a student loan acts similarly to any other loan. Timely payments of your EMI will work very well towards building up your CIBIL score and improving your credit history. The same goes for vice versa, but you can learn about it in better detail in this blog post.
Students can begin repaying their education loan after their graduation ends. You get what’s called a ‘moratorium period’ - where repayment can begin 6 to 12 months after graduation. But interest will accumulate when you receive the loan amount, so the faster you start repaying, the lower it’ll be.
Typically, people will choose to make a full repayment of their education loan within a few years, paying off a little more every month, or follow its terms to the fullest.
