Your Queries – Loans: Shorter term for student loan, better if parent pays

By Chaitali Dutta

Should I look for a shorter term of three years for a student loan and is there a prepayment penalty?
—SR Kumar

Typically, the term of a student loan would be 6 to 7 years, as the repayment of the loan would have to be made by the student after the course is completed. However, if you, as a parent, feel it is your responsibility to provide a higher education for your child, then a shorter tenure is preferable. This way, the total interest payment is smaller.

Can I transfer my variable rate mortgage to a fixed rate bank?
—Ashok Bisht

Yes, when you make a balance transfer from a home loan to another provider, you can modify the characteristics of the loan. However, calculate the total costs involved in the transfer. The additional interest margin you pay for a fixed loan should be less than the higher interest payment expected on the variable rate loan.

My housing finance company insists that I pay simple interest on the loan for prepayment. Why is this so?
—VR Vishwanath

When the full refund is made by check, the service provider may add a few days of interest on the current balance, to cover the liquidation of the funds. Interest is calculated on the daily declining balance formula itself. But, if we look at the formula, as the balance would stay the same for those 2-3 days, a simple interest formula would give the same result.

For an additional loan, do I have to have a mortgage with the same bank?
— Anmol Vatts

Yes, an add-on must be from the same company where the property is mortgaged with the home loan provider. A top-up loan is also essentially a home loan; therefore, the second supplier will not be able to have security on the mortgage.

Can I get the Section 80E tax benefit on interest paid on a student loan taken out with foreign financial institutions for study abroad?
— Soumyashree

Interest on the student loan is exempt from income tax if the loan is taken from an RBI approved financial institution. Consequently, a student loan taken out with a foreign financial institution will not be covered by this clause.

(The author is the founder, AZUKE Personal Finance Advisory ( Send your questions to [email protected])

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