Education Loan Comparison: A Detailed Guide

    Updated on: 24 May 2022

     


    The student community is a resilient one and the Covid-19 pandemic has not been able to dampen its spirit. Students in India are once again looking to go abroad for that esteemed “foreign degree” that will give wings to their careers. Though many factors play a role in their study abroad journey, one of the most deciding factors is the high cost associated with study abroad. Quite a lot of Indian students are hesitant to even dream of a foreign education for fear of the high cost associated with it, especially with the Covid-19 induced job and pay cuts. For these students, an education loan is the bridge that will make their dream a reality. An education loan takes care of all the study-related expenses at their dream foreign university and helps them overcome their financial constraints. 

    The education loan market is on an upward swing and has seen a growth of 34% - from INR 16,800 (in FY 2016) to INR 22,550 crore (in FY 2019).  Public sector banks, private banks, NBFCs and private entities are all vying for their share in this growing education loan market. As a result, they offer different kinds of education loans at varying terms and conditions, something that often confuses prospective loan seekers. In this blog, we will try to clear all confusion surrounding education loans by doing a detailed comparison of education loans available in the Indian market. So, without any ado, let us jump right into the discussion.

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    Secured Vs Unsecured Education Loans

    If you are a prospective education loan seeker, you might have heard of terms such as Secured education loan or education loan with or without collateral. Let us try and make these terms simple for our readers. 

    What is a secured education loan?

    A secured education loan also referred to as an education loan with collateral, is one where the borrower has to pledge an asset when taking a loan. This asset can be a tangible asset such as land, property, apartment, or intangible asset such as Fixed Deposits, Government Bonds, Mutual funds, etc. Nationalized banks, private banks, and NBFCs ask for collateral for loans exceeding a certain amount. The lender will make use of this collateral to generate funds in case the loan becomes a Non-Performing Asset (NPA). 

    What is an unsecured education loan?

    An unsecured education loan or an education loan without collateral is one where the bank does not ask for any security when sanctioning the education loan. 

    Differences between secured and unsecured education loan

    Secured Education Loan

    Unsecured Education Loan

    This kind of loan has a lower rate of interest and depending on the value of the   collateral being pledged, the applicant can get a higher loan amount. Students can   get loans amounts up to INR 1.5 crore.

    This loan has a higher rate of interest and the loan amount sanctioned is lower than a secured education loan.

    This kind of loan is easier to get for studying in most countries.

     This kind of loan is easily available only for a select few countries, such as the US, Australia, and Canada. 

    They have a longer processing time as the bank needs to verify all documents related  to the collateral being pledged.

    This loan has a shorter loan processing time.

    This loan does not need a co-applicant

     This loan needs a co-applicant. The loan amount in this kind of loan, the sanctioned loan amount depends  on the co-applicant’s CIBIL score and income.

    This loan has no repayment during the study period.

    Lenders require the borrower to pay full interest or partial interest during their study period. Though a few lenders offer a moratorium period, the interest does not get waived off but rather only deferred, thus increasing the total amount to be repaid to the lender.

    The loan repayment period is longer.

    The loan repayment is short.

     

    For more information on the comparison between secured and unsecured education loans, students can read here

     

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    Loans from Banks Vs NBFCs

    Banks, private and public, and NBFCs are the financial institutions that give education loans in India. Before discussing the differences between an education loan from a bank and NBFC, let us first understand how these financial entities raise funds that are loaned to borrowers. 

    Banks, whether public or private, borrow money from people (who are given an interest between 3.5% to 7% on their fixed deposit and saving accounts) and give it on loan to borrowers. NBFCs, on the other hand, borrow money from banks or other investors and then give loans. As is obvious, the rate of interest offered by banks would be lower than NBFCs - all other parameters being the same. 

    Let us now look at the differences between the loans offered by banks and NBFCs.

    Difference between the loans offered by banks and NBFCs

     

    Banks

    NBFCs

     Processing  fees

    Banks either have zero or very low processing fees for education loans. For an education   loan of INR 40lakhs, SBI charges a non-refundable fee of INR 10000 while Bank of Baroda and Axis Bank charge a refundable fee of INR 10,000.

    NBFCs typically have higher processing fees on the same loan amount. For an   education loan of INR 40 lakhs, NBFCs typically have a non-refundable processing fee  between INR 40000 and 80000.

     Processing  Time

    Banks typically have a higher loan processing time, especially if it is a secured education  loan. Most banks take around 15 days for processing an education loan.

    NBFCs have a quick loan processing time and are ideal for students who need the sanction of education loan in less than 5 days.

    Rate of Interest

    As mentioned above, banks have a lower rate of interest.

    NBFCs have a higher rate of interest.

    Tax benefits 

     Borrowers are eligible for income tax deductions under Section 80E of the Income Tax Act   when borrowing from banks.

    Education loans from NBFCs do not have any tax benefits.

    Interest repayment during the study period 

     Students who take secured loans from banks do not have to pay any interest during  their period of study. Their repayment starts after their moratorium period. Students who  take      unsecured education loans from banks have to make some interest repayment - either full  or partial- during their study period.

    Students who take education loans from NBFCs have to make repayment during the study period, irrespective of whether they took secured or unsecured education loans.  Some NBFCs, however, are flexible for deserving borrowers and make some exemption   on repayment during the study period.

     

    Things to Consider while comparing education loans

    Now that our readers have got a detailed understanding of differences between lenders and types of education loans, let us also list down some points that should be kept in mind when comparing loans - 

    1. Rate of interest - This tops our list of loan comparisons, simply because it plays a huge role in the total amount that you will eventually repay to the bank. Even a 1% difference in RoI has a substantial impact on your total interest paid, so compare the RoI before signing on any dotted line. Students should also check whether their RoI is fixed or floating. 
    2. Moratorium period - Most lenders offer a moratorium period during which the student does not have to make any loan repayment. The duration and conditions of the moratorium period vary from lender to lender, hence compare them well. 
    3. Processing fee - Comparing the processing fee is also a wise move as a lender can charge anywhere between 0% to 5% of the loan amount as a processing fee. Imagine paying INR 2 lakhs as a processing fee on a loan amount of INR 40 lakhs with a processing fee or 5% when you could have got it at a much lower or no processing fee. 
    4. Penalty on prepayment - This is another important comparison on our list. Lenders charge a prepayment penalty between 2% and 4% on education loans. Since many students wish to pre-pay their loan amount to avoid future interest amounts, having clarity on prepayment charges will help them plan their repayment better. 
    5. Interest subsidy scheme - Students would also compare if the loans they are comparing comes under the interest subsidy scheme.
    6. Loan tenure - A longer loan tenure would mean an increase in the total interest paid to the bank. Hence opting for a shorter loan tenure would be the wiser option. 

    Students can read here for a  more detailed understanding of the above-mentioned tips. 

    Still have doubts when comparing education loans? In that case, get help for free from GyanDhan for all your education loan-related queries now. 

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