Taking an education loan for higher education is a common practice these days. It covers not only tuition fees but also living and other expenses. Most education loans have a moratorium period, during which you do not have to pay EMIs until you complete your studies. But do you know whether repaying an education loan early is beneficial or harmful for you? In this article, we will find the answer to this question and know when you should repay your education loan early and when you should not.
Should an education loan be repaid early
Repaying an education loan is a responsibility, but there are some important things to consider before repaying it in a hurry.
Benefits of repaying early
The biggest advantage of repaying the loan before the scheduled time is that you avoid the huge cost of interest. The longer the loan tenure, the more interest you will have to pay. If you have extra money, using it to prepay the loan reduces the principal amount, which reduces the overall cost of the loan. Repaying the loan before the time increases your creditworthiness and improves your credit score. This also frees up your credit limit, which you get the benefit of when applying for a home or car loan in the future.
Disadvantages of repaying before time
Tax exemption is available on the interest of an education loan under Section 80E of the Income Tax Act. If you repay the loan before the time, then you are not able to take full advantage of this tax exemption. If the interest rate of your education loan is low, then instead of repaying it early, you can invest that money. The return on investment can be more than the interest on the loan, which will benefit you more financially.
Ask yourself these important questions
Experts believe that before taking any decision regarding prepayment of an education loan, you should ask yourself some questions. Is the interest rate on an education loan high? If yes, then it is beneficial to repay it early. Is its interest rate low? If it is low, then investing the extra money can be a better option. Are there any additional charges levied on prepayment? Be sure to check with the bank about this before repaying the loan.