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Pay off your education loan - Here is why...

Thursday, August 09, 2012 by Madan Mohan
  • Your education loan is often the first liability. To use a cricket term, your education loan lays the foundation of your credit innings.
  • Do not default on your education loan. Defaulting on your education loan will make it very difficult for you to repair your CIBIL credit history. Defaulting shows that you have failed the first credit test that you have been handed. Students, who have taken loans less than Rs. 4 lakhs (no collateral), may assume that simply relocating from the address they have submitted to the bank means that they can get away from not paying their loan. This is not true.
  • When you take a loan, the bank submits your details to a credit bureau such as CIBIL and that's when you are entered into credit records. Your credit report has your name, address, and all your credit history (any credit cards you have owned, a personal loan you have taken and so forth). 
  • Once you are registered with any of the four credit bureaus: CIBIL, Experian, Equifax and Highmark (you don't have to register, the banks will do that. You don't have a choice), all your details will be available to any bank that is a member of the credit bureau. Most banks are members.
  • If you can't make a payment on your own, borrow from family and friends. We cannot stress on how important it is that you don't default on your education loan.
  • Repayment: Try and service your interest during the study and holiday period. This may mean getting a part-time job. It may not be possible if you are studying in India but abroad it can be done.
  • If you get a job before the holiday period is over, service the interest. Start paying the loan only once you have been confirmed.
  • Do not make use of the entire duration of the loan period to pay off your loan. It suggests that you take too much time to pay off your debt. If you have a 7 year period, try and pay it off in 5 years.
  • The earlier you pay off your loan the better. This is because once you graduate and start a job, you will get offers for credit cards, auto and home loans.
  • All the above mentioned items add to your credit report, credit rating and credit history. You don't want to be saddled with too much debt very early in your career.

Madan Mohan is your banker turned counsellor. Having spent more than three decades in the banking industry, Madan took up the role of Chief Counsellor at ICICI Bank promoted, Disha Financial Counselling Centre. During his five year tenure, he helped distressed customers come out debt trap and helped others from falling into one.

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