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Personal Loan vs Education Loan – Which is Better for Higher Studies?

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Highlights

  • Personal Loan vs Education Loan - which is the right choice for higher studies?
  • Decide based on the comparison made between these two loans in terms of various aspects

Most families don’t have the savings to ensure their kids pursue higher studies. The cost of higher studies, be it in India or overseas, is quite high and is likely to go up further. But there are ways by which students can pursue their higher studies without any hassle. These are personal loans and education loans. Any of these loans can be paid in affordable monthly installments. Personal loans will be disbursed in the name of parents, while education loans will have students as the primary borrower and their parents as the co-borrower. So, the responsibility of paying a personal loan rests with the parents. Whereas, students will need to pay for the education loan after they complete their studies. In case students fail to get a job, parents will have to pay the education loan EMIs. But which of the two – Personal Loan vs Education Loan – is better for higher studies? Let’s read this post further and find out the better alternative.

Loan Amount

The borrowed amount depends on the student’s financial needs. The bank or financial institution provides education loans based on the educational course and expenses involved during the course period. And the education loan can vary from INR 50,000 to INR 1.5 crore depending on the university where the student will get admission to. For short term or part-time courses also, the lender provides education loans, for a maximum of INR 1.5 lakh.

See the table to know how much you can borrow from the bank or NBFC for a personal loan and education loan in India.

Bank/NBFCMaximum Personal LoanMaximum Education Loan
SBIINR 20 lakhINR 1.5 Crore
HDFC BankDepend on your income and credit score20-30 lakh
Bajaj Finserv Ltd.INR 25 lakhINR 1 Crore
Tata CapitalINR 25 lakhINR 25 lakh
Axis BankINR 15 lakhINR 75 lakh
ICICI BankINR 40 lakhINR 1 Crore
Kotak Mahindra BankINR 20 lakhINR 20 lakh
YES BANKINR 40 lakhNeed-based
RBL BankINR 20 lakhINR 10-20 lakh
Standard Chartered BankINR 30 lakhINR 80 lakh
Federal BankINR 25 lakhINR 10-20 lakh
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Interest Rate

The interest rate ranges between 8.30% to 20% on education loans whereas the personal loan rate ranges between 10.99% and 24%. Girl students can get an interest rate concession of 0.50% on their education loan. See the table below that compares the rates of the two loans.

Bank/NBFCPersonal Loan Interest Rate (per annum)Education Loan Interest Rate (per annum)
SBI9.60% - 13.60%6.90% - 9.30%
ICICI Bank10.75% - 18.49%11.25% - 11.75%
Axis Bank12.00% - 24.00%13.70% - 15.20%
Kotak Mahindra Bank10.75% - 17.99%12.33% - 16.00%
HDFC Bank10.75% - 21.30%9.65% - 13.25%
RBL Bank17.50% - 26.00%14.15% - 16.15%
Standard Chartered Bank11.00% - 15.00%6.90% - 9.30%
Tata Capital10.99% - 18.00%10.99%
YES BANK10.75% - 17.00%12.00% - 14.00%
Punjab National Bank8.95% - 11.80%6.90% - 9.40%

Moratorium Period

The moratorium is not available on a personal loan. This benefit is, however, available in an education loan. Using this students don’t have to pay EMI for 6 to 12 months after completing their educational course. The moratorium is of 6 months if you secured a job via placement right after the course completion, otherwise, it can be of 12 months. During the moratorium period, a simple interest rate is charged on the borrowed amount. Some lenders also provide concessions of 0.5%-1.00% on the interest rate on servicing interest payments during the moratorium period.

Loan Tenure

The repayment period for education loans and personal loans differ from each other. Banks and NBFCs provide a maximum of 15 years to the borrower to pay the loan amount with interest. And the repayment will start once the course is completed and the moratorium period is over. Whereas, personal loans come with a maximum duration of 5 years and the repayment starts from the next month of the loan disbursement.

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Education loans with a longer tenure will bring down the EMI amount substantially compared to a personal loan. But interest wise, the equation can be exactly the opposite. Now it depends on whether parents can get a personal loan amount that is sufficient for the education of their kids. More importantly, whether they can handle the applicable EMI. If they can do that with ease, they should not hesitate in taking a personal loan.

Tax Exemptions

Isn’t it worth availing tax benefits? Tax concessions help boost the take-home income of individuals. Which of the two – personal loan vs education loan – has tax benefits? Well, these benefits apply to education loans and not personal loans. Yes, students can get tax exemptions on the interest component for upto 8 years from the time the loan repayment begins, under Section 80E of the Income Tax Act.

Guarantor & Collateral

Education loans upto INR 7.5 lakh can be approved without any collateral. But beyond that, collateral will be required and here the parents will need to be co-applicants. The collateral can be in the form of a fixed deposit, house property, life insurance policy, etc. Whereas, in a personal loan, there’s no requirement of collateral. If parents have the required income to pay the applicable EMI and have a good credit history, the loan can be sanctioned. So, it’s clear which of the two – personal loan vs education loan – is better in terms of ease in approval and flexibility.

Margin

Personal loan vs education loan needs to be assessed on this aspect too. The lender may put a margin over the borrowed amount when borrowing an education loan above INR 4 lakh. And the margin is 5% if you borrow funds for higher studies in India. For overseas education, the bank usually charges a 15% margin on education loans. What is the margin? It is the portion of your loan amount which is not financed by the lender and needs to be managed by the borrower only.

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This type of problem doesn’t come up if you borrow on a personal loan. Parents can get 100% financing and can get funds in the account instantly without any trouble.

Conclusion

In the personal loan vs education loan discussion so far, one must have got the basic idea of these two products. While personal loans can be financed without collateral, unsecured education loans are granted upto INR 7.5 lakh only. Plus, education loans above INR 4 lakh are not financed fully. Personal loans can be offered upto INR 15-25 lakh on average. There are a few lenders that can give upto INR 40 lakh. The approval of personal loans is dependent on the income of parents and credit history. On the other hand, there’s not much of a difference between the two in terms of interest rates. For a better summation of the cost, both parents and students are advised to use the EMI calculator. This will make it clear the cost to bear towards either of these loans. Also, factor in the tax benefits of education loans to see whether the overall cost reduces compared to a personal loan.

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Personal Loan Interest Rates September 2020
Fullerton India14.00% - 33.00%
HDFC Bank10.75% - 21.45%
ICICI Bank10.75% - 18.49%
IndusInd Bank11.25%
Kotak Bank10.99% - 20.99%
RBL17.50% - 24.00%
Standard Chartered Bank11.00% - 15.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates September 2020
Axis Bank7.75% - 8.55%
Bank of Baroda7.00% - 8.40%
Citibank8.20%
HDFC6.95% - 8.00%
ICICI Bank6.95% - 8.05%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank7.20% - 9.30%
LIC Housing6.90% - 7.90%
Piramal Capital & Housing Finance9.00% - 9.10%
PNB Housing Finance8.60% - 9.45%
Reliance Home Finance8.75% - 14.00%
State Bank of India/SBI6.95% - 7.60%
Tata Capital9.20% - 9.35%