Education Loan

Factors Overlooked by Students When Choosing Education Loan Providers

Factors Overlooked by Students When Choosing Education Loan Providers

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Discover which factor is not considered by the students for availing education loan from a specific bank.

GyanDhan
Updated on:  01 Mar 2024 | 127 | 6  min read

In the quest for higher education, securing an education loan is a pivotal step for many students. Yet, the path to choosing the right loan provider is strewn with overlooked details and nuances that can significantly impact one's financial well-being and academic experience. This blog aims to shed light on which factor is not considered by the students for availing education loan from a specific bank.

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Top 6 Factors Overlooked by Students When Choosing Education Loan Providers

Higher education is a gateway to personal and professional growth but comes with a significant financial barrier. Education loans serve as a bridge, enabling students to pursue their academic dreams. However, the complexity of loan agreements and the diversity of loan providers mean that crucial details can easily be overlooked. One such overlooked aspect, which factor is not considered by students for availing education loan from a specific bank, underscores the need for a deeper understanding of these financial instruments. 

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Loan amounts and interest rate

Loan amounts and interest rates are a primary concern for borrowers, but a thorough evaluation involves much more. It's crucial to understand the difference between secured and unsecured loans and the impact of interest rates on the loan's amount and interest. 

  • list items Public banks typically offer the lowest interest rates due to their mandate to support education. However, they often require collateral for loans above a certain amount, which can be a hurdle for some students. The processing time might be longer due to the thorough documentation and verification process.
  • list items Private banks' interest rates are slightly higher than those of public banks, reflecting their commercial nature and the higher cost of funds. While they also offer substantial loan amounts, the cap might be lower than that of public banks. Additionally, they offer faster processing times and zero collateral requirements.
  • list items Non-Banking Financial Companies (NBFCs) usually have the highest interest rates among the three due to their higher cost of capital and greater risk appetite. NBFCs are known for their quick processing and minimal documentation.

 

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Comparison Between Loan Amount and Interest Rates
 

Basis Public Banks Private Banks NBFCs

Loan Amount

Up to INR 2 Cr

Up to INR 1 Cr

Up to INR 80 Lakh

Interest Rate

9.5% - 11.5%

11% - 13%

11.5% - 13.5%

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Collateral requirements

The requirement of collateral for secured loans is a factor that deserves more attention. Providing collateral can significantly lower interest rates and pose a risk to the borrower's assets. Conversely, unsecured loans from private lenders, while more accessible, come with higher interest rates and may impose more stringent repayment conditions. One crucial factor which is not considered by the students for availing education loans from a specific bank is that lenders require borrowers to pledge collateral that holds equal value as the loan amount.

Read to know the types of collateral accepted by lenders for an education loan.

Processing fees

Often overshadowed in discussions, processing fees can considerably affect the overall cost of the loan. Processing fees refer to the charges levied by lenders for the processing of loan applications. Processing fees are a critical aspect to consider when applying for an education loan, as they can significantly affect the overall cost of the loan. The disparity in processing fees between government banks and private lenders can significantly influence the total financial burden on the borrower. This hidden cost underscores the importance of thorough research and comparison before making a decision.
 

Basis Public Banks Private Banks NBFCs

Processing fees

Up to INR 10,000 + GST

Up to INR 1 Cr

Up to INR 80 Lakh

 

 

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Loan repayment

Loan repayment terms can significantly impact a student's financial situation after his course is over. Public banks provide more favorable repayment conditions, including full moratorium periods, which allow graduates to establish their careers before beginning to repay their loans. This flexibility is a crucial factor in managing long-term financial health and should be a primary consideration for borrowers. The repayment terms of the loan differ depending on the lender and the type of loan. With a moratorium period in hand, there are two options.

  1. list items Paying Simple/Partial Interest: The borrower is required to pay interest (whether in full or in part) only on the disbursed loan amount. Principal repayment starts after the moratorium period.
  1. list items Full Moratorium Period: The parent/student is not required to pay interest. The interest during the period of study gets added to the loan amount, and the EMI (equated monthly installment) starts after the moratorium period (duration of the course plus 6 months or 1 year).

For loans without a moratorium period, the EMI starts immediately which can significantly burden the students if the repayment starts immediately after the course ends. Therefore, knowing the repayment terms before taking the loan is crucial, as a default in repayment can damage the credit rating significantly.

Education loan insurance

Loan insurance provides a safety net in unforeseen circumstances, ensuring that the borrower or their family is not burdened with debt in case of an emergency. While government banks may offer incentives for purchasing loan insurance, private lenders often mandate it, adding another layer of consideration for borrowers. This safeguard is frequently overlooked but is essential for comprehensive financial planning.

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Tax savings

Section 80E of the Income Tax Act, allows a deduction of interest on education loans taken for the higher education of the individual, spouse, or children of the individual. The deduction is available without any limit. Therefore, the education loan can be applied for and repaid after considering the tax planning opportunities. But what students tend to ignore is that this tax benefit is only available for education loans via banks.

 

Selecting the ideal education loan provider is as crucial to your academic journey as choosing the right university. As you stand at the crossroads of your future, armed with dreams and determination, it's essential to navigate the financial aspects of higher education with wisdom and foresight. We have highlighted several critical, yet often overlooked, factors in choosing an education loan provider—ranging from understanding the nuances of loan amounts and interest rates to the implications of collateral requirements, the hidden costs of processing fees, the strategic importance of loan repayment terms, the security offered by loan insurance, and the potential for tax savings. 

 

While the pursuit of higher education is a path filled with challenges and opportunities, the financial decisions you make today will echo through your career and life. By giving due consideration to the aspects discussed, students can position themselves for a future where financial burdens do not overshadow academic achievements. We at GyanDhan encourage you to approach us during the crucial decision-making process with diligence and choose a lender that aligns with your educational goals and financial circumstances. Remember, investing in your education is investing in your future, and making informed choices will pave the way for success beyond the classroom. Let's make those dreams a reality with a foundation built on informed financial choices.

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Frequently Asked Questions

How do I determine the right loan amount for my education?

Consider the total cost of your education, including tuition, accommodation, travel, books, and other expenses. Factor in any family contributions or other sources of funding.

Can I apply for an education loan to study abroad?

Yes, education loans are available for studying abroad, but the terms, such as loan amount, interest rates, and required documents, may vary from domestic loans.

Should I opt for a secured or unsecured education loan?

This depends on your financial situation. Secured loans require collateral but typically offer lower interest rates and higher loan amounts. Unsecured loans are available without collateral but might have higher interest rates and lower loan amounts.

What documents are needed when applying for an education loan?

You'll likely need to provide an admission letter, academic records, income proof, identity proof, address proof, and possibly other documents depending on the lender's requirements.

Is having a co-applicant necessary for an education loan?

Many lenders require a co-applicant as a guarantor for the loan, which can improve approval chances and potentially secure better loan terms.

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