Sometimes, a family’s income may not be enough for financing a kid’s education, no matter how hard the breadwinner of the family works. In recent times, banks have come to the aid of such families with loans to enable the students to pursue their dreams of getting a higher education. However, the real trouble comes in the legal know-how and terminologies of the loan agreement. This confuses the students and their families especially when they’re trying to repay the loan amount.

Knowing the nuances of a legal document is fundamentally important, which becomes even more necessary in the case of student loans. Hence, some of the important terms are presented below to enable prospective loan customers to be better informed before taking a loan.

1. Capital

In the world of economics, the initial amount loaned to the customer is known as the capital. In legal terms, this is known as the quantum of finance. This is the amount for which sanction has been solicited by the applicants. The capital needs to be returned in its entirety upon the completion of the time period of the loan.

2. Moratorium

This is the time period for which the bank does not levy payment dues on the debtor. Usually, it extends for 6 months after the completion of the degree course. In some cases, it can also extend up to 1 year. This period is kept in place in order to enable the debtor to get placed in a job or to start their own employment.

3. Capability Certificate

In some cases, particularly when the condition of the family of the applicant is not enough to convince the bank authorities of recovery of the student education loans, the bank may request producing of a certificate undertaking the monetary ability of the student’s family to pay off the loans in the stipulated time. Since loans cannot be kept running indefinitely for long periods of time for fear of them turning into non-performing assets, this certificate assumes significant importance. The importance increases, even more, when the loan is taken for admission to a higher education course outside the country since capability certificates are also solicited by the admission authorities and college administration.

4. Interest

In simple words, this is the additional charge levied by the bank on the initial capital loaned to the debtor. However, in the case of educational loans, this assumes a slightly different context. While interest on other types of loans is calculated as compound interest, the interest on educational loans is calculated as simple interest. This infers that the amount to be finally returned increases in a linear manner instead of an exponential manner, thus saving the debtor from additional worry.

5. Collateral

In layman’s language, this is more widely known as the security. As is the case with other types of loans, this is a tangible asset kept in security by the banks in lieu of the educational loan. In case the debtor is unable to pay the capital and interest, banks have the right to recover the said amount by using the collateral, including but not limited to the sale of the collateral. In the case of educational loans, this collateral usually consists of documents pertaining to the ownership of land or house. Hence, the installments for repaying the loans need to be paid in time in order to save the collateral from being lost.

These are some of the most common terms which confuse the applicants yet are the most important in the loan agreement. Applicants for various educational loans must go through these terms and associated conditions along with their preferred legal help before taking loans in order to secure their future without worrying about the repayment without any additional worry in their minds.