Don’t bury an ambition for want of money
Vivek Kaul Friday, February 24, 2006 23:20 IST
Padhoge likhoge banoge nawab; kheloge kudoge banoge kharab —Old Hindi saying
MUMBAI: For Ashish Choudhary, it was the best of times and the worst of times. He had been granted admission to the Sentinel Centre for Human Resources Development (SCHMRD), a top business school. This morning, his girl friend, Sunanda, had called up to say that their relationship was over.
They had broken up more often than he could remember. But she always came back. It made him wonder, did she ever love him? Or was it the case of him loving her always and she just reciprocating. A bit like the television serial, The Wonder Years, he playing Kevin Arnold to Winnie Cooper.
An emotionally hurt Choudhary had a number of things to sort out before he started his MBA in SCHMRD. Right now, the priority was an education loan. The total cost for the two- year course would be around Rs 4 lakh. His parents are willing to bear his education expenses, but he did not want it that way.
Choudhary made a visit to a public sector bank, down the road. They were willing to give a loan. He needed to submit a proof of admission to SCHMRD, a schedule for expenses for the specified course, passport size photographs, etc.
The loan would cover his education, hostel fees, books and a computer. The bank would charge an interest of 10.5%. The bank gave education loans for up to Rs 10 lakh for studies in India and up to Rs 20 lakh for studies abroad. He also had an option of buying a two-wheeler, which would cost up to Rs 50,000. The bank was ready to increase the loan amount to Rs 4,50,000. Choudhary did not feel the need for a two-wheeler.
Increasing the loan amount would have had two implications. First, the interest rate would go up to 11.5% as the bank charged a higher interest rate for loans greater than Rs 4 lakh. Second, for a loan greater than Rs 4 lakh, the bank would give a loan to meet only 95% of the total expenses i.e, the bank would be willing to give a loan of Rs 4,27,500.
Choudhary would have to raise the remaining Rs 22,500. This, in technical terms, is referred to as the margin amount. In case of loans taken for overseas study, the margin money amounts to 15% of the total expenses.
One thing Choudhary could not figure out was, “When a bank could offer a 20-year home loan of Rs 20 lakh at an interest rate of 9%, why was it charging 10.5% on a education loan of Rs 4 lakh?”
The answer lies in the fact that giving out education loans is an inherently risky business. A lot of students who take the loan do not repay and the bank has to bear the loss. So for loans greater than Rs 4 lakh, borrowers have to provide a security to a bank.
This could be shares approved by the bank, house property, national savings certificate, etc. Thus, if the borrower defaults the bank can sell these assets and make up on the losses.
The loan repayment would have to start one year after Choudhary completes the course or six months after securing a job, whichever is earlier. This condition essentially ensures that if an individual does not get a job immediately after completing his course, he has sometime on his hand before the repayment starts.
Choudhary would have to repay the loan through equated monthly instalment (EMIs) over five years. This would involve paying an EMI of Rs 8,598, six months after he started working. He would get a tax rebate on the interest part of the EMI.
Having figured out how to go about getting the education loan, Choudhary was looking forward to time away from the city and his ex-girl friend, Sunanda. Maybe, distance might make her heart grow fonder and life like always would start going around in circles.
(The example is hypothetical)
Padhoge likhoge banoge nawab; kheloge kudoge banoge kharab —Old Hindi saying
MUMBAI: For Ashish Choudhary, it was the best of times and the worst of times. He had been granted admission to the Sentinel Centre for Human Resources Development (SCHMRD), a top business school. This morning, his girl friend, Sunanda, had called up to say that their relationship was over.
They had broken up more often than he could remember. But she always came back. It made him wonder, did she ever love him? Or was it the case of him loving her always and she just reciprocating. A bit like the television serial, The Wonder Years, he playing Kevin Arnold to Winnie Cooper.
An emotionally hurt Choudhary had a number of things to sort out before he started his MBA in SCHMRD. Right now, the priority was an education loan. The total cost for the two- year course would be around Rs 4 lakh. His parents are willing to bear his education expenses, but he did not want it that way.
Choudhary made a visit to a public sector bank, down the road. They were willing to give a loan. He needed to submit a proof of admission to SCHMRD, a schedule for expenses for the specified course, passport size photographs, etc.
The loan would cover his education, hostel fees, books and a computer. The bank would charge an interest of 10.5%. The bank gave education loans for up to Rs 10 lakh for studies in India and up to Rs 20 lakh for studies abroad. He also had an option of buying a two-wheeler, which would cost up to Rs 50,000. The bank was ready to increase the loan amount to Rs 4,50,000. Choudhary did not feel the need for a two-wheeler.
Increasing the loan amount would have had two implications. First, the interest rate would go up to 11.5% as the bank charged a higher interest rate for loans greater than Rs 4 lakh. Second, for a loan greater than Rs 4 lakh, the bank would give a loan to meet only 95% of the total expenses i.e, the bank would be willing to give a loan of Rs 4,27,500.
Choudhary would have to raise the remaining Rs 22,500. This, in technical terms, is referred to as the margin amount. In case of loans taken for overseas study, the margin money amounts to 15% of the total expenses.
One thing Choudhary could not figure out was, “When a bank could offer a 20-year home loan of Rs 20 lakh at an interest rate of 9%, why was it charging 10.5% on a education loan of Rs 4 lakh?”
The answer lies in the fact that giving out education loans is an inherently risky business. A lot of students who take the loan do not repay and the bank has to bear the loss. So for loans greater than Rs 4 lakh, borrowers have to provide a security to a bank.
This could be shares approved by the bank, house property, national savings certificate, etc. Thus, if the borrower defaults the bank can sell these assets and make up on the losses.
The loan repayment would have to start one year after Choudhary completes the course or six months after securing a job, whichever is earlier. This condition essentially ensures that if an individual does not get a job immediately after completing his course, he has sometime on his hand before the repayment starts.
Choudhary would have to repay the loan through equated monthly instalment (EMIs) over five years. This would involve paying an EMI of Rs 8,598, six months after he started working. He would get a tax rebate on the interest part of the EMI.
Having figured out how to go about getting the education loan, Choudhary was looking forward to time away from the city and his ex-girl friend, Sunanda. Maybe, distance might make her heart grow fonder and life like always would start going around in circles.
(The example is hypothetical)
posted by Vivek at 2:18 AM
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