Securing Your Loan

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You’re reading an excerpt of Admitted by Soundarya Balasubramani. Written by an Ivy League graduate from India, this is the proven guide for students worldwide looking to pursue undergraduate or graduate study abroad in the U.S., Canada, or Europe. Purchase for instant access to the guide and other exclusive resources—including sample SOPs, sample resumes, scholarship lists, and a private community with other readers.

Much of this chapter is written with an Indian audience in mind. If you are from another country, you may still find it useful, but many of the details will differ. We suggest you find additional resources in your country for loan information.

Introduction to Loans and Visas

We hope you took a break to relax after all that hustle for more than six months. Loans and visas are two topics that are almost thought of as a given, that everyone will get them with time.

But valuable information on these topics is neither easily available nor intensely searched for.

My father is a veteran banker, so he took care of most of the procedures related to securing my loan. For my visa, I went over a few posts on Facebook groups to look at past visa interview questions, prepared for them, and got it on my first try. However, I ended up taking out a bigger loan than needed, and heard about visa categories such as O1 and EB1 much later in my journey than I would’ve liked.

Even barring those consequences, I know, in hindsight, that the following chapters contain information that I dearly wish I had known a few years ago. Let’s begin with helping you secure your loan!

Stop. Don’t Skip.

We get it. Learning about loans doesn’t sound interesting. You would rather spend time taking an online course or setting up your LinkedIn profile (which you can do in the chapter LinkedIn, Networking, and E-learning).

actionBut before you skip this chapter (and we hope you don’t!), read and re-read the following three principles so you don’t commit a huge mistake later on:

  • Loans are not the only way to fund oneself. First, try to source as much money as possible from other sources like scholarships, assistantships, and fellowships—as discussed earlier—before resorting to a loan.

  • Traditional banks in India are not the only sources of loans. We go through three other entities you can look at in this chapter. Also note that you aren’t obligated to take out a loan from a single entity. For example, if you need INR 30,00,000, you can take out a smaller loan of INR 15,00,000 from two sources that offer a lower rate of interest than from a single source offering INR 30,00,000 at a higher rate of interest.

  • Once you pick the source(s), follow the do’s and don’ts we’ve laid out at the end of the chapter. Everything was written based on stories we’ve witnessed.

If you plan to read ahead, fantastic! We’ve tried to keep the information simple and easy to follow, but if you come across terms you don’t understand, spend a few minutes reading about them online. It’ll be worth it.

Estimate Your Need

Let’s start with the foundational question, how much money do you need?

Instead of guessing based on your tuition fee, let’s go back to our trusted friend, the Dream Tracker. Navigate to the sub-sheet titled Loan Estimation.

actionFirst, spend some time reviewing the sheet and the text added below.

Second, understand that the numbers added there are a very approximate average. Review each category and edit the numbers to reflect your situation. For calculating your rent and food, use the link available next to the table and search for your location. For Visa and Immigration, leave it as is unless there’s been a change in fee.

Finally, add a buffer of 10% on top of the total amount needed, after taking into account scholarships and personal funds. For example, if your loan amount comes out to INR 30,00,000, add a buffer of 3,00,000 on top of it.

Remember, your loan is meant to cover not just your tuition costs, but also your living expenses.

Loans: 101

Let’s start with the definition of a loan.

A loan is a type of credit vehicle in which a sum of money is lent by a party to another party in exchange for future repayment of the value. In most cases, the lender also adds interest and/or other finance charges to the principal value, which the borrower must repay in addition to the principal balance.

Sounds good? Now, along with the loan, there are a few more terms whose definition you might benefit from.*

  • Lender/Creditor: The party lending the sum of money.

  • Borrower/Debtor: The party borrowing the money to be repaid later.

  • Principal: The initial value of the sum of money being lent.

  • Interest: The amount charged by the lender as fees for the privilege of borrowing money, to be repaid in installments over a period of time.

  • Interest Rate: The amount of interest charged by the lender for the privilege of borrowing money, expressed as a percentage of the principal.

  • Finance Charges: A fee charged for the privilege of borrowing money to be repaid later. It can be a flat fee to be paid once (processing fees, late payment charges, etc.), or a percentage of the principal to be paid over the period of the loan (also called interest).

  • Loan Tenure: The duration of the loan repayment plan.

  • Loan Documentation: The document(s) that contain the details, and the terms and conditions, of the loan that is provided. It is a legally binding document that is signed by the lender and borrower.

  • Sanctioned Amount: This is the maximum amount of money the lender is willing to lend to the borrower.

  • Collateral: Any asset of fixed value which the lender accepts as security for a loan, such as real estate and property. The value of the collateral is typically more than the principal amount of the loan. It is a form of protection for the lender. If the borrower defaults on their payments and/or is unable to pay the amount, the lender can legally seize the collateral and sell it to recoup some or all of its losses.

Did you know that credit cards are also a type of loan?* Some loans, like a housing loan, are a one-time offering. On the other hand, credit cards are simply an open-ended line of credit that keeps revolving. Once you pay back the amount for a month, you can take it out again the next time.

Credit Score and You

Your credit score is a measure of your creditworthiness.

It is calculated based on your credit history, which includes the following factors: current debt (if any), debt history, repayment history, length of credit history, etc. If someone were to lend you money, they would want to look at your credit score to answer the question: will this person pay me back my money on time? The higher your score, the more willing they would be to give you their money.

statsIn the U.S., the credit score ranges between 300 and 850. In India, it ranges between 300 and 900. While the range differs per country, having a higher score is better everywhere.

In 1956, engineer Bill Fair teamed up with mathematician Earl Isaac to create Fair, Isaac and Company (later renamed to FICO), with the goal of creating a standardized, impartial credit scoring system.* By 1958, they began pitching their first credit scoring system to 50 American lenders.* Fast-forward thirty years, they created a general-purpose credit score system we now call the FICO system. Since then, FICO has become the industry standard in the U.S., and is used by most lenders, if not all. As of 2020, the FICO score is evaluated by the three major credit bureaus: Experian, TransUnion, and Equifax. These three bureaus share the information on an as-needed basis when a lender, such as a bank, requests for it.

Switching back to India, there are four companies licensed by the Reserve Bank of India (RBI) to collect and compute credit information: CIBIL, Equifax, Experian, and CRIF Highmark. Each of them offers their own proprietary credit score, based on the 300 to 900 scale. Of these four, CIBIL’s score is the most popular one, and is evaluated by the TransUnion CIBIL Ltd,* which maintains credit files on 600 million individuals and 32 million businesses. The CIBIL score was first introduced in 2007 as India’s first generic risk scoring model for banks and financial institutions.

Whenever you make a transaction relevant to your credit score, such as making a payment using your credit card or paying off a loan, your bank sends the details to all four companies, as mandated by the RBI.

Of course, we understand the curiosity!

You can get your credit score for free from any of those four companies.

In exchange, you will need to provide your personal data, such as PAN and mobile number. Still, it’s worth checking your score to see where you stand. In India, a good credit score is typically between 650 and 750, and anything above that is great. In the U.S., a FICO score of 700 or above is considered good, while a score of 800 or above is considered great.

danger Credit scores do not follow you around the world. Even if you have an excellent credit score in India, your credit history will have a clean slate when you move to the U.S. If you’re thinking, can I then escape a bad credit history by moving abroad? The answer is no. This is because when you apply for a visa to a foreign country, your debt will be examined. If you have large debts (and therefore a bad score), it will raise suspicion and will most likely lead to refusal of the visa.*

Back to Educational Loans

So far, we learned about loans and credit scores. Let’s switch our focus to the main topic now: educational loans.

Educational loans can be of two types: secured and unsecured.

A secured loan, also called a loan with collateral, is where the borrower is required to provide collateral of some form, which is of greater value than the value of the principal amount. An unsecured loan, one without collateral, as the name suggests, is a loan where the borrower is not required to provide collateral of any form. Instead, the borrower will be judged based on the 5 C’s.*

  • Character: This can include your credit score, employment history (if any), and references.

  • Capacity: This can include your current income and debt, if any.

  • Capital: This deals with your current net worth, including but not limited to money in savings or investment accounts, investments, deposits, etc.

  • Conditions: The terms and conditions of the loan.

  • College/Course: This deals with the university and course you have chosen to pursue. It takes into account the reputation of your chosen university, along with your academic performance so far.

In brief, a secured loan is more common and gives you a lower interest rate, more lenient terms of repayment, and a higher sanctioned amount. If you have collateral of any sort, go for a secured loan!

Four Paths for Securing Loans

We said it before, and we’ll say it again.

Traditional banks are not the only source to secure a loan.

The educational loan market is a very lucrative one, and there are plenty of other players who offer competitive terms to get more customers. Your strategy should be to get a free quote from players across the market, compare the offerings, and pick the ones that suit your needs best. We will go into more detail on how to compare loan offerings later in this chapter. For now, let’s learn about the four kinds of entities.

Traditional Indian Banks

Let’s start with the one we all know about: traditional banks. There’s a good chance you can name at least five banks off the top of your head. Go ahead, try it.

Traditional banks can be subdivided into two broad categories: private sector and public sector. A public sector bank is one in which the government owns the majority of shares. In India, State Bank of India is a good example, where the government owns 58.6% of shares, as of July 2019.* A private sector bank, on the other hand, is one where most of the equity is owned by private bodies, corporations, institutions, or individuals. Some common examples are ICICI and HDFC.

Since public sector banks are owned by the government, they offer a lower interest rate and a lower sanctioned amount. You also get sub-par processing times. On the other hand, private banks have higher interest rates, but offer better service and slightly better processing time.

Actually, there’s a third category in India: small finance banks (SFBs). To explain that, you first need to know what a payments bank is. Payments banks are a new banking model licensed by the RBI to cater to low-income households.* These banks offer bank accounts (which can hold up to INR 1,00,000) but cannot issue loans or credit cards. However, the catch is, once they complete five years of operations, they can get an SFB license, which would allow them to begin lending money. Payments banks like India Post and PayTM have shown interest in obtaining this license (and by the time you read this, they might have obtained it already!).

So, be sure to check on this, since they might offer low interest rates, being new players.

Traditional U.S. Banks

Even before we talk about the traditional U.S. banks, it’s worth mentioning that the U.S. offers federal loans through something called the Free Application for Federal Student Aid (FAFSA).*

FAFSA is a form that you need to complete to determine your eligibility for financial aid. The good news is, federal aid is offered at a lower than normal interest rate (at times lower than 3%) and does not require a credit check. Once a FAFSA is submitted, your school works to identify the financial aid package you are eligible for and the federal government directly issues the funds to the school to cover your costs.

danger Only those who are U.S. nationals, permanent residents, or eligible non-citizens can apply for the federal student aid program.* Check your eligibility, and if you fall under one of those categories, then don’t think twice about it. Go ahead and apply.

Most of you might not be eligible, though, and that’s OK! You’ve got plenty of other options. Let’s look at them now.

The major traditional banks in the U.S. that offer loans are J.P. Morgan Chase, Goldman Sachs, Wells Fargo, Citibank, and Bank of America. Most of them also have an offering specifically tailored for international students. There are two scenarios you will face here:

  • Co-signer: Just like how a collateral is an asset that gives the lender some peace of mind, a co-signer is a person who promises to pay back your loan if you are not able to. Your co-signer needs to be a U.S. citizen or permanent resident, preferably with a good credit history (> 690 credit score). From our experience, co-signers are generally relatives or close friends who have been in the U.S. for a while.

  • No co-signer: You can still get a loan without a co-signer, and even without a credit score. But (there’s always a “but”), these kinds of loans are what the industry refers to as subprime loans, or high-risk loans, that have pretty bad terms. The terms would most probably be worse than what you get in India, or your home country. We do not recommend this option unless you have exhausted all other options.

Whatever option you go ahead with, always get a quote, since it’s free to do so and you never know what terms they might offer.

That being said, there are other solutions on the market which need not involve a traditional bank.

Enter neobanks.

Neobanks

Neobanks is the answer to the question, what would banking look like if it went completely digital?

Neobanks are a new type of fintech entity that rose to prominence in just the past 5–10 years.* Here are a few of their characteristics:

  • They operate exclusively online, meaning no physical branches

  • They offer digital services, often mobile-only

  • They leverage the latest technologies (like machine learning) to provide services customized to their clients

They have two ways of operating: independently or by partnering with a traditional bank.

The former kind obtain their own banking licenses and operate on their own. The latter are banks which do not have their own banking licenses, and instead partner up with a traditional bank to provide their services. Now, why would they do that?

In India, RBI, as per its 2014 guidelines, requires banks to have a physical presence in order to obtain licenses.* Hence, the only option for neobanks in India is to partner with a traditional bank and offer services. Some popular ones include InstantPay, NiYo, and RazorpayX (by Razorpay).

On the flip side, the U.S. has no such restrictions, hence neobanks can obtain their own licenses (although not all have received them yet). Some popular ones include Chime, Varo, Aspiration, and Social Finance Inc. (commonly known as SoFi).

Anish Achuthan, CEO and co-founder of Open Financial Technologies, says:*

For traditional banks, it is difficult to change their legacy technology for which they have already spent a lot. Neobanks, on the other hand, are small and nimble. […] Although all banks offer transactions through UPI (unified payment interface), customers prefer non-banking apps such as Google Pay and PhonePe, which offer the service in partnership with traditional banks.

In 2020, due to the COVID-19 pandemic and subsequent lockdowns, all industries moved their services online, and the banking sector was no exception. We can be sure that even post-pandemic, many of these changes would remain in place. Our speculation is that, with neobanks forming an integral part of the banking space, RBI might choose to offer regulatory support and eventually permit neobanks to receive banking licenses even if they operate independently. Keep an eye out for that.

In conclusion, neobanks offer many advantages over traditional banks—personalized offerings, competitive terms, real-time service (for payments, balance checks, etc.)—and you need to take advantage of that!

Non-Banks

That might sound like an oxymoron for this chapter, but bear with us.

Thus far, all the entity types we saw have been banks of some kind. However, there are other fintech entities that offer educational loans, but do not qualify as banks. In fact, because they are not constrained by the regulations set for a bank, they can do much more for you than just offer loans, like:

  • set up a bank account in the U.S.

  • refinance an existing loan

  • provide scholarship options.

Let’s look at four examples of non-bank lenders and compare them below:

  • Leap Finance is based in Bangalore and San Francisco.* They offer loans without collateral, help you open a bank account in the U.S. before you leave India, and even assist in choosing the courses during your graduate studies. Although established in 2019,* they have already raised investment of over $5.5 million from leading angel investors, including Sequoia India.*

  • MPOWER Finance is based in Washington, D.C.* It is a social benefit corporation founded by former international students. Like Leap Finance, they too offer services outside educational loans, such as scholarships and job search preparation.

  • Stilt Finance is based in San Francisco.* They offer educational loans for people with and without a credit score (and even to those who don’t have a Social Security Number).

  • Prodigy Finance was founded in 2007 and is based in the U.K.* They only cater to students looking to pursue their graduate degree abroad. Instead of a fixed-rate option, they offer a variable interest rate option, so the total amount you pay will be tied to the variation of the three-month London InterBank Offered Rate (or LIBOR*).

NameLoan AmountCo-signer and CollateralFixed Rate
Leap FinanceNot AvailableCo-signer RequiredAvailable
MPOWER Finance<= $25,000Not RequiredAvailable
Stilt Finance<= $25,000Not RequiredAvailable
Prodigy Finance>= $15,000Not RequiredNot Available

Aside from non-banks aimed at helping international students, you can also look at peer-to-peer lending platforms like the aptly named LendingClub.* Founded in 2006, LendingClub allows borrowers to receive unsecured loans in the range of $1,000 and $40,000.* The standard loan tenure is three years, however, five-year tenures are available at a higher interest rate and for an additional fee. They use your credit score, credit history, requested amount, and other indicators to create the terms of agreement.

We only mentioned the few non-banks that we’ve heard of. If you don’t get a satisfactory quote from them, explore on your own (and let us know if you find a good solution!).

How To Choose Your Loan Provider

So far, you learned a lot about the various options available for you out there. To cap it off, we built a mental model in the form of a flowchart that you can use to pick the right options. We also went a step further, and created a table comparing the various options available side-by-side.

We hope you find the next few pages useful!

NameIndian BanksU.S. Federal AidU.S. BanksNeobanksNon-banks
Application Processing Time~ 1 week (private sector). Longer for public sector.3 days - 3 weeks~ 1 week< 1 week< 1 week
Interest Rate (w/o co-signer or collateral or good credit score)Not ApplicableLowHighMediumLow
Interest Rate (w/ co-signer or collateral or good credit score)HighNot ApplicableMediumLowMedium
Co-signer and CollateralAt least one requiredNot RequiredAt least one requiredTypically Not RequiredTypically Not Required
Credit HistoryHighly RelevantNot RelevantHighly RelevantRelevantNot Relevant
Loan Tenure7+ years10 years7+ yearsFlexibleFlexible
Terms of AgreementNot FlexibleNot Flexible (for good reason)Not FlexibleFlexibleFlexible

danger We broke our heads trying to come up with the flowchart and table above because there are too many outliers when it comes to lenders. Hence, any form of generalization chips away a lot of valuable information. So, please do your own research into each lender before finalizing anything.

Getting Quotes: Do’s and Don’ts

As you begin to approach these entities, keep the following in mind:

  • Do your due diligence before, during, and after the process.

    • Before: Check websites like Quora to read other people’s experiences.

    • During: Prepare a list of questions you want answered (to make your job easier, we’ve added a checklist of questions to ask in the Resources folder).

    • After: Begin thinking about your repayment plan from day 1 (more on this soon).

  • Do bargain. The people you talk to will mostly be sales reps who get commissions based on the number of sales. Use that to your advantage and ask for a reduced interest rate, reduced fee, flexible terms, etc.

  • Do apply to more than one entity. In most cases, getting a quote is free. Once you get from more than one, you can begin to compare offerings.

OK great, we’re glad you got quotes from a bunch of places! The process you need to follow to pick one is no different from the one you followed to pick your university.

actionFirst, create a table with the factors you care about. Here are the ones we think you should look at: sanctioned amount, interest rate, annual percentage rate, expected EMI to be paid, processing and disbursement time, fees or penalty, loan tenure, currency of disbursement and repayment, repayment terms, etc.

Second, assign priorities. This is very important. If you don’t, it will look like each offering is equally good, as it will fare well in a few categories. For example, a neobank might give you a lower interest rate than a private bank, but the sanctioned amount will also be less than you need.

Finally, don’t restrict yourself to picking just one option. Remember what we mentioned in the beginning of the chapter? It’s better to pick more than one option if it means you get a lower interest rate overall.

Below are some handy tips to keep in mind as you make your choice:

  • APR >> interest rate. Some lenders mention a low interest rate but add a lot of charges that end up making your APR much higher than other offerings. Watch out for that.

  • Imagine the worst-case scenario and ask yourself, will I be able to pay the EMI even then? Pick the option(s) where the answer is yes. Don’t choose a low-tenure loan just to get a low APR, if there’s a risk of defaulting on the loan.

  • Keep an eye on the bottom line. Calculate the total amount you would end up paying at the end of the tenure for all offerings. Longer tenure loans usually mean higher total amounts paid, even if interest rates are lower.

danger Although it might sound like fixed-rate interest is better than variable-rate interest, studies have found that over time, the borrower is likely to pay less interest overall with a variable-rate loan.* Again, this is not true all the time. Our recommendation would be to go for a variable-rate loan for a short tenure, and a fixed-rate loan for a long tenure (assuming the variable-rate loan has a lower interest rate/APR). This way, you can escape market fluctuations that could impact the interest rate. In fact, during the 2008 financial crisis, many borrowers who had picked a variable-rate mortgage on their house found that their monthly payments had skyrocketed once the rates began to adjust.

Congratulations once again on getting your admit and supporting your dream, financially!

  • As mentioned earlier, create a repayment plan on day one. Create a good-looking tracker (like the Dream Tracker) that you update regularly, and review it every month to see your progress.

  • Look for refinancing options in the host country. Given the cutthroat nature of the lending market, most lenders will refinance an existing loan at a lower rate, especially if you build up a strong profile. And guess what? Once you begin your grad school, you’ll add a few more feathers to your cap through assistantships and grades.

  • Try to consolidate your loan down the line. Lenders tend to offer favorable terms to consolidate, given that you’re more likely to pay it off once you do that. This goes hand-in-hand with refinancing. Try to do both at the same time if you can.

With that, we’ve reached the end of helping you secure your loan!

Final Thoughts on Handling Loans

Loans and visas are two topics that people think of as a given, and almost no one dives deeper to understand the nuances. But we know you’re different! And we hope you read this chapter completely. If you didn’t, here are some key points to remember: loans are not the only way to fund yourself, traditional banks are not the only source of loans, and it is important to follow the do’s and don’ts we laid out if you choose to take a loan.

If you’ve decided to take a loan, fantastic! First, make sure to use the Loan Estimation sheet in the Dream Tracker to figure out exactly how much you need, then add a 10% buffer on top. We laid out some key terms related to loans in the chapter, which will come in handy. One of the biggest factors in taking a loan is your credit score: the higher it is, the better are your terms.

We covered four kinds of entities that lend money: traditional Indian banks, traditional U.S. banks, neobanks, and non-banks. A neobank is a new type of bank that is 100% digital, sometimes mobile-only. Non-bank lenders are typically fintech companies who are primarily focused on lending, but also offer other useful features like scholarships and U.S. bank accounts. You can use the flowchart we created to figure out suitable options, and then use the table to compare them further.

When getting a quote, do your due diligence, try to bargain, and do apply to more than one lender. Once you get quotes, use the method you followed to rank your universities once again. Create a repayment plan on day one, keep looking for refinancing options, and if you take multiple loans, see if you can get a better rate by consolidating them. Congratulations once again on getting your admit and working to fulfill your dream financially!

A Little Reflection on Loans

thinkDid you estimate the amount needed? Was it less or more than your expectation?

Did you know about neobanks before reading this chapter? Were they more advantageous than a traditional bank?

What was something that surprised you while looking into the various entities? Is it worth sharing with the wider community?

Getting Your Visa25 minutes, 1 link

Dormancy Ends

I remember a period of dormancy in the months of May and June, after picking Columbia University and packing my bags from NIT Trichy.* This dormancy ended when I had to begin preparing for my visa interview. Like any diligent student, I combed through dozens of questions and answers on Facebook groups and student forums, practiced speaking in front of the mirror, and hoped for the best.

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