Educational aspirations have grown tremendously, and so has the demand for professional courses at the best centres of education. But quality education extracts a steep price, which can be a hindrance in the fulfilment of a student’s aspirations. This is where a loan come to your rescue, helping you finance your education needs. In this article, we can talk about two financing options: education loans and personal loans, and how to pick one in order to get the best deal.
Purpose: Personal Loan Vs Education Loan
A personal loan is a versatile loan that can be used for any financial need. It is an unsecured loan for which you are not required to pledge a collateral. You can avail a personal loan for any purpose such as buying a gadget, funding travel, buying a car, or even financing your education.
An education loan can be availed only for education and its related expenses. So unlike a personal loan, an education loan is taken for a specific purpose. The student is the main borrower in an education loan. The onus of its repayment will be on the student after they start working. An education loan can be availed for pursuing all types of courses — graduation, post-graduation, diplomas, or vocational courses — whether in India or abroad.
Depending on the fees, institute and destination, the loan amount varies from Rs.50,000 to Rs. 1.5 crore. The bank or financial institution considers the course and related expenses needed during the course tenure. Whereas a personal loan amount can go up to Rs. 40 lakh based on the borrower’s credit profile and can be used for any purpose. So an education loan can, in extreme cases, allow you to borrow higher. The eligibility to any amount in any loan category will differ from one person to another.
The interest rate on an education loan is typically lower than a personal loan from the same lender. For example, a large government bank pegs its lowest interest rate on education loans at 6.80% and its lowest personal loan rate at 9.60%. These rates—and the difference between the two categories—vary from one lender to another. The lowest rates are often reserved for students seeking admission to premier institutes such as IITs and IIMs. Concessions may also be available to women and reserved category students. Some banks also offer rates concession if a student starts paying off the loan during the moratorium. Since interest rates are lower in case of education loan, opting for it keeps your equated monthly instalments (EMIs) low. Education loans also come with lower processing fees compared to personal loans.
Collateral And Guarantor Required
A personal loan borrower is not required to give a guarantor or pledge collateral to avail it. This makes a personal loan popular and convenient to avail. Since the education loan is usually offered in the name of the student, a co-applicant or guarantor is required. The lending institution may also ask for additional collateral if the loan amount exceeds Rs. 7.5 lakh.
The tenure for an education loan can extend up to 15 years. It is important to keep in mind that the longer the tenure, the smaller the EMI. In an education loan, lower interest rates and higher tenure period makes the EMI lower. For a personal loan, the tenure is up to five years and the interest rates also higher, which makes the EMI outgo higher.
A moratorium is that grace period given by the lender during which you are not required to repay the loan. This is usually granted during your course work period and six to 12 months after the completion of your course. The repayment starts once the moratorium ends. This period can be further extended in case of a medical emergency, unemployment etc. In a personal loan, no moratorium is offered. The banks may allow a moratorium for a personal loan if there is a crisis like the current Covid-19 crisis. But this is completely on bank’s discretion. The EMI repayment process starts as soon as you avail a personal loan.
You can avail tax benefits for an education loan under Section 80E of the I-T Act. The deduction can be availed from the total income of the student only for the interest part of the EMI and not for the principal amount. A student can avail this benefit for a maximum period of 8 years from the day he/she starts repaying the loan. You cannot get the tax benefits in case of a personal loan.
Education loans come with a lower interest rate, longer tenure, moratorium and tax benefits, which makes it convenient for a student to avail funds. But a student would require co-applicant, guarantor, co-borrower to avail a higher loan amount. A personal loan in such a scenario extends a helping hand as it will be granted to you without any collateral or co-borrower.
The author is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.
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