Bank vs. NBFC Education Loan: The Ultimate Comparative Guide

Updated on: 04 Sep 2023 8 min read

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In India, both banks and Non-Banking Financial Companies (NBFCs) offer education loans to study abroad. Banks, which are regulated by the Reserve Bank of India (RBI), play a crucial role in the Indian financial sector. Public sector banks, such as the State Bank of India, Bank of Baroda, and Punjab National Bank, are government-owned institutions. Private banks, like HDFC Bank, ICICI Bank, and Axis Bank, are privately owned entities. 

On the other hand, NBFCs, which are non-banking financial institutions, offer education loans without holding a banking license. They raise funds through various means, such as deposits, bonds, and debentures. Prominent NBFCs like HDFC Credila, Avanse, Auxilo, and InCred specialize in providing education loans, along with other financial products, catering specifically to the needs of students.

Comparison between Banks and NBFCs for study abroad loans

List of leading Banks and NBFCs for education loan in India

Functional difference between Banks vs NBFCs for abroad education loan

1. Regulatory oversight: Banks are regulated by the Reserve Bank of India (RBI) and are required to follow stringent guidelines regarding interest rates, loan terms, and customer protection. In contrast, NBFCs are regulated by the RBI but have comparatively more flexibility in determining interest rates and loan conditions.
    
2. Interest rates: Banks borrow money from common people like you and me. They give us interest on our savings accounts and fixed deposits, which generally are 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 the interest rate that an NBFC would offer would be higher as compared to banks as they lend money from outside.
      
3. Loan amount and collateral: Public banks typically offer secured education loans up to INR 1.5 Cr or even higher with collateral. Public banks only offer unsecured loans up to INR 7.5 Lakh, which is usually insufficient. However, for faster loan approval and more flexible documentation, NBFC education loans without collateral are a preferred choice.
    
4. Loan application process: Banks typically have a more extensive documentation and verification process. They require borrowers to submit various documents, such as proof of admission, academic records, income proof, collateral details (if applicable), and more. NBFCs have a more streamlined application process, often requiring fewer documents for loan approval. They may have more relaxed eligibility criteria and faster turnaround times for loan approval and disbursal. NBFCs can be a suitable option for borrowers who require quick access to funds.
    
5. 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 the case of NBFCs (except HDFC Credila).

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Factors to consider while choosing Banks and NBFCs for abroad education loan

1. Interest rates: Compare the interest rates offered by different banks and NBFCs to choose the most affordable option. Generally, public banks offer the most competitive rates starting from 8.15% whereas private banks offer slightly higher rates starting from 11.50%. NBFCs on the other hand offer interest rates starting from 11.75%.
    
2. Loan amount: Assess your financial requirements and evaluate the loan amount offered by different lenders to ensure it covers your educational expenses adequately. Generally, banks offer higher loan amounts compared to NBFCs. Public and private banks offer loans upto 1.5 cr and more whereas NBFCs offer loans upto INR 80 - 90 Lakh.
    
3. Processing time: If time is a crucial factor, opt for a lender with a quick loan processing and disbursement mechanism. Banks take higher processing time as compared to NBFCs. So, if you require a 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.
    
4. 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.
    
5. Repayment during the course period: 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.

Both banks and NBFCs offer education loans with their unique features and benefits. Students can explore options from both sectors to find the most suitable loan product that aligns with their financial requirements and preferences. Whether it's public sector banks with their wide network and government backing or NBFCs with their customized loan offerings, students have choices to make their study abroad dreams a reality.

• NBFC 
• Banks 
• Study abroad 
• education loans