What are the Cheaper Alternatives to an Education Loan in India?
Last Updated : Sept. 11, 2020, 12:44 p.m.
Getting an education loan in India is not that easy. The student needs to have a good academic record for approval. Even then, if they are eligible for the education loan, they will need collateral, guarantor and co-applicant to get the education loan. However, the best part about the loan is that the repayment happens 6-12 months after the completion of the educational course, unlike other loans whose repayment begins immediately. But how much will the education loan cost you? Well, it will depend on the interest rate charged by the lender. Education loans are available at an interest rate of 10%-17% per annum on average. But the actual rate of interest will depend on the reputation of the college/university, student’s overall educational background, job prospects, etc. In case these aspects don’t come superior, the interest rate can get higher. If that turns true in your case, you should contemplate other options too – loan against property, loan against the public provident fund, loan against life insurance, etc. Choosing any of these could lower your overall outgo. Let’s read about these options in this post.
Alternatives to Education Loans
As a student, you may not have the alternatives shown above to finance your education. But your parents can have. So, if both of you are reading, it will be easy to comprehend alternatives and the way they can be used for education.
Loan Against Property
A loan against property can be used to procure loans for education at a lower rate of interest. For loans above INR 7.5 lakh, lenders don’t finance a collateral-free education loan. Lenders accept the property as collateral. It can help you get a lower rate of interest. This is called loan against property for education. Meanwhile, parents have the option of taking a loan against property without mentioning the purpose. If this option is availed, there won’t be conditions like academic records. Plus, an individual can borrow it solely without any co-applicant. Check out the loan against property interest rates in the table below.
| Bank/Housing Finance Company | Interest Rate |
|---|---|
| SBI | 7.00% - 7.70% |
| Piramal Housing Finance Ltd. | 10.50% Onwards |
| Tata Capital Ltd. | 10.10% Onwards |
| YES Bank | 12.00% - 16.00% |
| PNB Housing Finance Ltd. | 7.99% - 10.50% |
| LIC Housing Finance Ltd. | 9.50% - 10.50% |
| ICICI Bank | 8.35% - 9.50% |
| HDFC Ltd. | 8.75% - 10.40% |
| Fullerton India | 9.00% - 24.00% |
Gold Loans
Gold is a traditional item that can be found in many Indian households as they accumulate it for purposes like marriage. But it can be used to procure loans too. You may not have the gold quantity to get loans that will be sufficient for education. But when you face a shortfall, gold loans can help you. The gold loan can be used to meet your needs at much lower rates than that of education loans. Gold loans are offered by banks and non-banking financial companies (NBFCs). The loan is sanctioned very fast and disbursed to your bank account quickly. Usually, it takes 24 hours to get the gold loan sanctioned. You can get as much as 65-90% of the gold value as a loan. Check out the interest rates charged on gold loans.
| Banks/NBFCs | Interest Rate (in Per Annum) |
|---|---|
| State Bank of India (SBI) | 7.50% onwards |
| Muthoot Finance | 12.00% - 27.00% |
| Manappuram Finance | 12.00% - 29.00% |
| ICICI Bank | 10.00% - 19.76% |
| HDFC Bank | 9.50% - 17.55% |
| Axis Bank | 13.00% |
| Canara Bank | 7.65% |
| Kotak Mahindra Bank | 10.50% - 17.00% |
| Federal Bank | 8.50% Onwards |
Loan against Insurance Policies
The other option against the education loan is to mortgage your insurance policy. If you have an insurance policy, the lender can give you a loan up to 80-90% of the policy’s surrender value. The Loan against life insurance policy interest rate is between 9%-13% per annum. However, a minimum of 3 premium paying years should have been crossed before you apply for a loan. Plus, the loan is offered against insurance policies having a surrender value and not the term insurance plans. Check out the below table to know the lender’s interest rate for this loan type.
| Banks/NBFCs | Interest Rate (In Per Annum) |
|---|---|
| HDFC Bank | 8.70%-12.35% |
| SBI | 9.25%-11.90% |
| ICICI | 8.90%-11.00% |
| Tata Capital | 10.50% onwards |
| Fullerton India | 11.00%-18.00% |
| Axis Bank | 10.50%-12.75% |
| Kotak Mahindra Bank | 9.25%-13.00% |
Loan against PPF
Are you investing in a Public Provident Fund? If yes, it is an opportunity for you to borrow a loan against the PPF deposit amount. The PPF account must be active for over 3 years with regular deposits in it. However, the loan amount is limited to 25% of the balance plus interest as at the end of the first year of your PPF account. You can borrow a loan against PPF between the 3rd and the 6th year. This means if you opened a PPF account in 2009 to 2010, you can take a loan from 2011 to 2012 onwards until 2014 to 2015. The repayment tenure for the loan is a maximum of 3 years or 36 EMIs. You can apply for the loan multiple times between the 3rd and the 6th year if the previous loan is fully paid off.
Loan against Fixed Deposits
If you have some fixed deposits, you can use them to get funds for education. You need not liquidate them, instead just apply for a loan against FD at your bank , which will most likely finance up to 70-90% of the FD value. The interest rate is usually 1-2% higher than the interest rate you receive on your FDs. So, if you earn 5% on your FD, you will most likely pay interest at a rate of 6-7% on a loan which is still lower than the education loans. However, the loan against FD needs to be paid before the Fixed Deposit matures. Check out the table below to know bank FD interest rates. By knowing the FD rates, you can get an idea of the interest rate you will be offered on the loan taken against the said deposit product.
| Bank | Interest Rate (in Per Annum) |
|---|---|
| State Bank of India (SBI) | 2.90% - 6.20% |
| ICICI Bank | 2.50% - 6.30% |
| HDFC Bank | 2.50% - 6.25% |
| YES BANK | 3.25% - 7.25% |
| Kotak Mahindra Bank | 2.50% - 4.90% |
| Axis Bank | 2.50% - 6.50% |
| IDFC First Bank | 2.50% - 5.75% |
| IndusInd Bank | 2.50% - 6.00% |
Loan against Other securities and Investments
Just like FDs, your investments in Mutual Funds, NSCs and Shares can also be used to take loans from leading financial institutions and banks. The interest rate may vary but is still lower than the ones charged in the case of education loans. However, do remember that the institutions or banks have a list of approved mutual funds or companies whose shares can be used as collateral to get loans. The sanctioned loan amount will be lower than the total value of your securities to guard lenders against market fluctuations.