What Is An Endowment Loan And Why It Is A Risky Affair

What Is An Endowment Loan And Why It Is A Risky Affair

Endowment loans are an interesting and a very popular concept, especially for college students. Unlike how a traditional loan payment is wholly made to the lender, here, only the interest is repaid to the lender while the principal amount is channeled into an endowment fund. The lender is paid the interest on the mortgage for a fixed tenure, while the principle amount of the loan is invested in funds that would yield good profits and eventually pay back the loan’s principal amount.

Just like every other loan, an endowment loan is a risky affair as instead of receiving the complete payment along with interest on a routine basis, the lender only gets the interest while the principal amount is invested wisely to be returned later. An endowment loan is usually connected with a life insurance as post the maturity of the insurance, the concerned lender is paid back the hefty sum.

An endowment loan is a very primitive method of borrowing money, and it is often followed in today’s times by private foundations, trusts, charities, and other such philanthropic institutions. Just like a bridge loan, acquiring an endowment loan is easier as compared to a regular loan. Various colleges keep an endowment fund specifically for students, which can be withdrawn during the time of need. While colleges do contribute to the endowment funds, often major corporate organizations also donate money to these colleges.

Risks involved
When it comes to an endowment loan, the risks are high. Consider the fact that the lender will be receiving only a fixed interest on the loan given, while the principal amount is endowed in insurance policies and various such financial assets. While, initially, this said arrangement is working in favour of both parties, troubles soon brew up when high premiums or low returns become a conundrum.

Things to remember before getting an endowment loan
Endowment loans can be tricky if not done right. It may sound like a piece of cake and easily available as opposed to acquiring a traditional long-term loan; however, you must be aware of the catches that could later cause trouble:

  • Surrender value
    One ought to be extremely careful of this point as it would decide the future of all the additional loans you might want to take. Policies should be assigned in favor of the insurer to be able to get a loan after the settlement of the endowment loan. A surrender value is basically the amount that you would reap if you terminate the policies to opt for a loan. 
  • Repayment norms
    You should ensure that you bite only how much you can chew. Fixate on the interest amount you would be able to repay as well as the policy option that would work for your benefit. When completing the documentation process for an endowment loan, make sure to read the documents carefully and sign for payment of the principal amount at the maturity of the fund.