Difference between education loan from banks and NBFCs

    Updated on: 24 May 2022

    Financing is a major hurdle in your study abroad dream. As India’s first education loan startup, we have tied up with several banks and Non-Banking Financial Companies (NBFCs) to bring the best education loan options to you.

    One question that we often get from students is whether they should opt for a bank or an NBFC. Both are completely different financial entities and hence, their loan products also vary a lot, thus creating a lot of confusion. In this article, we are going to clear all the cobwebs of confusion so you can best decide between banks and NBFC's.

    Get Free Help From GyanDhan in Applying to Banks/ NBFCs

    1) Banks vs NBFCs: The Functional Difference

    Banks borrow money from common people like you and me. They give us interest on our savings accounts and fixed deposits, which generally is around 3.5% to 7%. Hence, in banks, it is safe to assume the average cost of borrowing money for them is between 5.5% and 6%.

    On the other hand, NBFCs borrow money from banks or investors, wherein their average cost of borrowing money is approximately 9.5 %. Now, if both of them are lending money to the same customer base (i.e. students), then all else equal, the interest rate that an NBFC would offer would be higher as compared to banks.

    Hence, whenever a student chooses an educational loan from an NBFC, then the interest rate is definitely going to be higher.

    More details:

    Secured Loan: A loan, which is attained with the aid of collateral is called a secured loan. Banks like State Bank of India, Bank of Baroda offer interest rate between 9 to 10% for secured loans whereas NBFCs charge between 11 to 13 % for the same.

    Secured Loans via GyanDhan: GyanDhan recommends, that if you are taking a loan with collateral (secured loan), then PSUs are the best options. Though a word of caution here, that loans from PSUs involve quite a number of documents and you need to have all of them in place. GyanDhan can help you with the proper documentation and also collect your documents from your doorstep in the most seamless way. We have technically integrated with SBI and BOB so that their products can be available to our consumers with ease and reliability in the shortest amount of time. What’s more – you don’t pay any additional charge to us.

    You can check your secured loan eligibility here.

    Unsecured Loans: When you are taking a loan without offering any collateral, then it is called as an unsecured loan. Axis Bank is the only Indian bank in the market, which offers unsecured loans greater than 7.5 Lakhs and up to INR 40 Lakhs depending on the profile.

    Currently, ROI in Axis Bank for unsecured loans starts from 10.5 % to 12.5 % whereas ROI in NBFCs starts from 11.5% to 15%. Majority of the students who get a loan sanctioned from NBFCs get it in between 12.5 % to 15%.

    Unsecured Loans via GyanDhan: GyanDhan has partnered with Axis Bank and NBFCs to help you with unsecured loans in the most hassle-free way.

    You can check your unsecured loan eligibility

    2) Processing Fees:

    Generally, banks have low (up to INR 10K) or even a policy of no processing fees whereas NBFCs charge a processing fee in the range of 1% to 2 % of the loan amount.

    Just for example, if you take a loan of INR 40 Lakhs, here are the approximate processing fees of various banks & NBFCs:

    SBI: INR 10,000 (Non Refundable)

    Bank of Baroda: INR 10,000 (Refundable)

    Axis Bank: INR 10,000 (Refundable)

    Typical NBFC: INR 40,000 to INR 80,000 (Non Refundable)

    3) Processing Time:

    Banks take higher processing time as compared to NBFCs. So, if you require loan urgently (like in 5 days or so), then an NBFC will definitely be the preferred option. On the other hand, if you have ~15 working days at your disposal then you can take the education loan from banks as well.

    Again, we have partnered with both NBFCs and banks, so we direct you to the right partner taking your urgency into account.

    4) Tax Benefits:

    If you take a loan from a Bank then you (or your co-applicant) will automatically become eligible for income tax deduction under section 80E i.e. the interest you pay to the bank can be included in your non-taxable income. On the other hand, there are no clear income-tax exemption guidelines in case of NBFCs.

    5) Payment of Interest During the Course-Period:

    Secured Loan: In a bank, you don’t have to pay any interest while you study. Your repayment starts once you get a job or 6 months after completion of the course (whichever is earlier, depending on the bank.)

    On the other hand, in NBFCs, you have to pay a certain amount (full/partial interest) every month, which would be an additional burden to your co-applicant/family.

    Unsecured Loan: In case of an unsecured loan, you have to pay interest while you study irrespective of whether your loan is from a bank or NBFC. Do note that, in some cases, NBFC can be more flexible to reduce your monthly interest to a small partial interest amount. So, if paying interest during your study period is a challenge, then NBFC is the way to go. We help our customers select the right option taking their liquidity constraints into account.

    Conclusion: While for some students banks will be preferred, NBFCs will be the better option for the others. It depends on various factors like the ones mentioned above, as well as document availability, co-applicant income, target course/college, location, etc.

    So, what is the best option for you? We can help you make the right call. You can request a call back from GyanDhan. At no cost to you, our dedicated relationship manager will give you a call to discuss your options in detail and help you in financing your studies abroad. Also, if you are planning to take an education loan via SBI, then we have launched a new service of door pickup of documents (at zero cost) which will reduce your time and effort substantially.

    First published date:

GyanDhan is India's first education financing marketplace.

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