Higher education may need funds, which can be borrowed through an education loan. The majority of students and parents choose such loans to fund tuition fees, living expenses, and other miscellaneous expenses. The important aspect of an education loan is the Equated Monthly Instalment (EMI), the regular monthly payment you make to settle your loan. Underestimating or overestimating your EMI may lead to financial hardships. This article covers mistakes that individuals make while calculating their student loan EMI and how to avoid them.
Why EMI Calculation Matters
EMI calculation provides you with an estimate of your monthly payments. It allows you to plan, compare loans, and prevent late payments. However, even a small mistake in the inputs of a student loan calculator can impact your finances over the long term.
Mistakes to Avoid While Calculating Your Student Loan EMI
Before you decide on your loan tenure and amount, you should be aware of some mistakes that may lead you to incorrect EMI calculations. Some of the mistakes that students and borrowers should avoid are as follows:
Excluding Some Expenses
Some borrowers only keep the tuition fee in mind while calculating EMI and do not include hostel fee, exam fee, travel, and books in their calculations. This results in underestimating the entire loan amount. Avoid this by keeping your loan amount sufficient to cover all expenses related to study and living.
Overlooking the Interest Applicable During the Moratorium Period
Education loans usually have a moratorium period. This means that repayment does not start for a certain period post-course completion. However, even during the moratorium period, interest is applied. Individuals may ignore this and calculate EMI only based on the principal. You must avoid this and ask the lender if interest is being charged during the moratorium, and account for it while calculating your EMI.
Choosing the Wrong Loan Tenure
Choosing a shorter tenure may lower the interest but increase the EMI. Choosing a longer tenure can lower the EMI but increase the total interest paid. Not verifying your repayment capacity can lead to an incorrect tenure choice. Therefore, you must choose a tenure which is suitable for your monthly cash flow and aligns with the total repayment plan.
Failure to Use an Appropriate EMI Calculator
Manual calculation of EMI or generic calculators available on a personal loan app may not consider processing fees, step-up EMIs, or cost reduction due to prepayment. This results in inaccurate monthly payment amounts. Ensure to use a reliable, education-loan-specific EMI calculator that considers all the loan parameters.
Assuming a Fixed Interest Rate Without Confirmation
Some borrowers may assume that the interest rate of their loan remains the same over the entire repayment period. However, loans may carry floating interest rates, which can change over a period of time. Verify with the lender if your rate is floating or fixed and estimate potential rate fluctuations in your EMI.
Not Including Processing Fees and Other Charges
Processing charges and administrative charges may not be taken into consideration while calculating EMI. Even though they do not affect your EMI, they will affect the total cost of the loan. Therefore, include all the charges and the fees in your calculations.
Overestimation of Future Salary for EMI Affordability
Some students expect a good-paying job after graduation and plan EMI repayments accordingly. This might create financial burden if recruitment is delayed or less than less-than-expected pay is available. Maintain modest income expectations and prepare an alternate repayment plan in case of recruitment delays.
Ignoring Currency Fluctuations
For students studying abroad and availing foreign exchange loans, not considering currency fluctuation can result in incorrect EMI calculations. Negotiate currency risk with your lender and include a buffer period in your EMI calculation.
Not Revisiting EMI Plans Throughout the Course
Conditions change, from new scholarships to part-time jobs or extra courses. Not updating EMI calculations according to changing conditions can lead to incorrect financial plans. Re-evaluate and re-calculate your EMI periodically according to changing needs and financial conditions.
Conclusion
Knowing how to calculate your student loan EMI is an essential part of managing your education loan. Small errors in loan tenure, rate of interest, and repayment capacity can lead to financial difficulties. Furthermore, ignoring currency fluctuations, the impact of various fees and overestimating your futures pay may lead to incorrect calculations. By avoiding these errors, you can make informed decisions and simplify your repayment process. Whether you are studying in India or overseas, proper planning can make your education loan manageable.