Floating Interest Rates in Education Loan

In fixed interest rates, the rate of interest fixed at the time of taking the loan is what you will have to pay for the entire repayment period. There are no alterations, irrespective of changes in the market. 

Floating interest rates, as evident from the name, have a floating nature and fluctuate with the market forces. The interest rate may increase or decrease multiple times during the entire duration of the repayment period. The RBI determines the base rate based on market dynamics, and the interest rates are pegged to the base rates.

While the sum of fixed interest rates is simple and doesn’t need much deliberation, floating rates are complex to predict the total sum of interest repayment. Consider the non-linear EMIs when calculating the monthly interest before taking an education loan with floating interest rates. 

Floating interest rates for abroad education loan

It is better to compare the floating interest rate for the education loan before finalizing your lender. Note that the effective interest rate is determined by the type of education loan and your profile’s strength.

Here is a comparison of different lenders and their *floating interest for education loans:

*Floating interest rates as of 01.07.2023

Floating interest rates allow you to enjoy positive changes in the financial market. If the RBI decreases the margin of interest rates, the floating rate will be lowered. The lowered interest rates will apply until the next revision cycle, usually yearly, quarterly, or half-yearly. 

However, if the RBI increases the marginal lending rate, the floating rate will be higher than you pay. But the chances are fewer since the overall economy doesn’t vary absurdly in a sporadic manner.

The Marginal Cost of Funds Based Lending Rate, commonly called the MCLR, is the benchmark interest rate below which banks can’t lend. The RBI introduced it in 2016 to make the lending process more democratic and uniform for all lenders. 

When the MCLR changes, the interest rate on loans linked to it also changes. This means the EMI amount you must pay will increase or decrease depending on the MCLR. A lower MCLR will lead to lower interest rates and, thus, lower EMIs for borrowers. 

MCLR depends on factors like Repo rate, operating cost, cost of funds, loan tenor(duration of the loan), etc.

However, the MCLR got replaced by EBLR, or External Benchmark Linked Rate, in 2019. Although many lenders still follow MCLR, eventually the EBLR will be adopted by them. 

Your education loan floating interest rate is either repo-based (RLLR) or MCLR based. It is calculated as MCLR+ A% or repo rate+ A%. Here, the “A” is constant, known as the premium percentage, and the MCLR or repo-based rates keep changing at certain intervals.

For instance, 

• If a student takes a loan at 11% MCLR and A(constant)= 3%, the interest rate will be 14%
• But if RBI decides to lower the repo rate to inject some liquidity into the market, and the MCLR drops to 9%, the new interest rate will be 12%

It’s a matter of market conditions and RBIs repo rate that decide the extent of fluctuations in floating interest rates. 

But, as mentioned earlier, it is not like a stock market; rates don’t change abruptly and unevenly. So, floating rates can benefit long-term loans, as paying a fixed interest rate may increase your repayment.

• The range of variation is from 0.25% - 0.50%
• The rate of change is not an abrupt number but a very minimal change
• The MCLR rates only change, not the premium percentage

For example if your overall interest rate was 13.50%, then it can barely float between 13.25% - 14.0%. 

The reset period is when the interest rates will be reset to the current rate based on market changes. The bank decides the reset period, and the borrower must carefully read the documents and convey that the reset period is acceptable to them. 

• The reset period will be mentioned in the sanction letter or the loan agreement
• The rules about the reset period vary from one bank to another. Some banks give the reset period one month, while most banks keep the reset period to one year. 

The rationale behind keeping a long reset period is that the benefit of a lower interest rate can be transferred to a borrower for a relatively long period. But in a long reset period, if the rates increase, the borrower has to pay a higher interest rate for a relatively long duration. 

Plan your education loan repayment amidst the interest variations:

• Big savings with smart repayments: education loan repayment strategies

• How to repay your education loans faster?

• How to plan your education loan repayment?

There is no fixed rule to assess which is better; it depends on the market changes and your financial choices. 

Floating rates benefit the student if RBI policy makes the interest rates low. In such cases, the flexibility of interest rates reduces the burden on the EMIs, which is a significant relief to students who start earning after completing the course. 

But if the market is adverse, the floating interest rate can add up to your debt. It is better to see both sides of floating interest rates to make an informed decision. The table below compares the pros and cons of floating interest rates: 

If assessed from the present state of affairs, India is on track to witness colossal growth, and RBI will keep the interest rates lower to encourage lending. So, going with the floating interest rate will be conducive for the times to come. But again, everything reverses if the market conditions turn back unexpectedly.

A crucial action is evaluating the market conditions before applying for an education. Take our help and ease your work. We will do the market research for you and suggest the best loan option while you are in the comfort of your home.

Read also:

• Education loan interest rates
• How your education loan interest can change
• Abroad Education Loan without Parental Income
• Education Loan for Abroad Studies: Explore Student Loans