Studies have suggested that students rely mostly on bank loans to meet the cost of their higher education.
Studies have suggested that students rely mostly on bank loans to meet the cost of their higher education. It is necessary to find the right source of funds for higher education. Factors such as lower interest rates, favourable terms and other benefits must be considered before availing of an education loan.
Borrowers generally face the confusion of choosing between education loans and personal loans in order to finance their studies. This article encompasses the necessary details that will help a student choose between a personal and an education loan.
Difference between education loan and personal loan:
Below is a point-by-point analysis to help borrowers weigh their options depending on their needs. This will help them decide which type of loan suits them better so as to fulfil their academic aspirations.
Coverage of funds
The biggest factor to consider before availing of an education loan is the cost coverage. The quantum of loans that borrowers can get ranges from INR 7.5 lakhs to INR 1.5 crore. However, in a personal loan, borrowers can get a maximum of INR 25 lakhs.
However, in exceptional cases, a personal loan can be extended to INR 40 lakhs. If you wish to pursue your higher education abroad, an education loan will be the best to fulfil your wishes.
The interest rate
The interest rates in an education loan start at 8.45%. This rate is for loans with collateral. However, the interest rate starts at 10.5% for loans without collateral. Education loans which are unsecured run the possibility of a higher interest rate, i.e., up to 14%.
However, personal loan offers interest ranges from 10.5% to 24%. For girl borrowers, education loans come with an additional interest concession of 0.5%. This facility is not available in personal loans.
Tax benefits
There are no tax benefits available on personal loans. If a person spends on education through an education loan, they can be saved from the burden of income tax. A deduction of interest can be claimed by the borrowers on the loan taken for pursuing higher education. This can be claimed under section 80E of the Income Tax Act, 1961.
Also, the Tax Collected at Source, under the Liberalized Remittance Scheme (LRS), on amounts in excess of INR 7 lakhs is only 0.5%. This condition applies only if the funds are remitted through an education loan. The Tax Collected at Source on funds remitted through any other source is 5%.
Government interest subsidy schemes
Several interest subsidy schemes, apart from the above tax benefits on an education loan, help in reducing the interest burden on the borrowers. Padho Pardesh Scheme of Interest Subsidy, Central Sector Interest Subsidy Scheme, and Dr. Ambedkar Central Sector Scheme are some of the few schemes. These can be availed by the borrowers/students at the start of their education loan. However, these schemes are exclusively eligible only for education loans and not for personal loans.
Moratorium period
The moratorium period is referred to the period when the borrower is not in need of making any loan payments. The moratorium period in an education loan is typically a course period plus 12 months. However, there is no moratorium period for a personal loan. The EMI on a personal loan starts just after the disbursement of the loan amount.
Prepayment penalty
Interest payments can be saved through prepayments. In the case of prepayment, lenders do not levy any penalty charge on an education loan. However, in personal loans, the prepayment penalty charge can be 2.5% or more plus GST. The exact penalty charge depends on the lender and the loan amount.
Loan tenure
The loan tenure of 10 years is another benefit of an education loan. The loan tenure for a personal loan is of 5 years. For students, there is a great advantage in a longer tenure as the EMI becomes manageable.
When should you opt for a personal loan?
Personal loans are ideal only for smaller sums of money. They are also considered ideal for a shorter duration. The process for a personal loan requires minimal documents and is easy and quick. The key factor in determining eligibility for a loan is the credit score. A borrower might be pre-qualified for a personal loan depending on the credit score.
There are numerous avenues that borrowers can explore. However, education loans stand the highest among them to fund higher education. The situation is the same in India or abroad. When borrowers are looking for a quick funding solution, personal loans are more suited as they can be used for immediate spending.
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