23-Sep-2017 written by : FSI-Team
Loans are not good or bad, it's the way the borrower treats them makes all the difference. So irrespective of the kind of credit one has whether in the form of loans or credit card borrowings their treatment impacts the way they are reported which in turns forms the basis for the credit score. Education loans are given on easy terms so as to ensure that no deserving student misses a chance to get higher education due to lack of funds.
Often these loans are the borrower’s first brush with credit so they in way set the basis for the rating for future; their reporting may or may not hurt the credit rating. Here are a few situations and their impact on the overall credit rating:
As per the rules laid down by most lenders a student need not start repaying the loan till the moratorium period is over. This moratorium period ranges from 6 months to 1 year after course completion or getting a job and may depend on the lender's policy. In the meanwhile the loan will be reported to the credit bureaus and will feature on the credit report but since repayment has not started for this loan it will not be included when calculating the score. If the amount is disbursed in installments at the beginning of each year or semester then the amount owed will keep rising but rest the status quo will be made.
After the moratorium period is over the borrower needs to start repaying the installments. In case the borrower fails to do so then obviously the default will be reported to the rating agency and it will show in the CIR in the subsequent report/s till the dues are cleared. Even after the dues are repaid, the past delays or missed payments continue to reflect in the CIR for up to 36 months. Repayment history is the biggest contributor the credit score and missing even a single payment could do serious damage to the rating. In the case of multiple loans the damage caused by a single missed payment will be less intense as long as the other loans are paid on time, however if education loan is the only loan that one has and there is a default in that then it would have a greater impact on the credit. Depending on long the dues have remained unpaid, the account may be reported as a NPA, Sub-standard or doubtful; this kind of reporting hurts the credit. Older the default the more harmful its impact is.
If for some reason the student cannot pay a loan they should try and work out a solution by getting in touch with the lender. For a genuine reason like the student not getting a job the lender may be willing to extend the moratorium period or agree on smaller EMIs by extending the loan duration. The borrower should avoid defaulting on the loan altogether. As we said earlier education loans are often the first and the only loans for a borrower (at least for some time) any default will have a very negative impact. Just like defaults could raise a red flag so can settling a loan and contrary to what many may believe a settled account will not work as a bad credit fix. If the borrower has not paid dues for considerable time then the lender could send it for collections to another agency or to its in-house collection department. In such a scenario if the borrower pays less than what is due to him/her the lender may report it as settled; a settled account is bad for the credit score. It would be better for the borrower to try and negotiate a longer tenure or easy terms of repayment so that account is not reported as “settled” but as "paid" or "closed" which is better for the credit rating.
So as we said earlier loans are not good or bad but the way they reflect in your CIR does hurt or improve your chances of getting or not getting credit in the future.