The journey to higher education can often feel like a steep uphill climb, especially considering financial aspects. It’s no secret that pursuing academic qualifications, whether in India or abroad, can be a costly endeavour.
As a result, many students and their families face the dilemma of how to fund their education. This is where loans come into play, and two of the most popular options are personal loans and an education loan for students.
Understanding Personal Loans and Education Loans
The decision between personal and educational loans often boils down to understanding what each type entails.
● Personal loans are multipurpose loans that you can utilise for any expense, including education costs.
● They come with a fixed interest rate that doesn’t fluctuate throughout the tenure of the loan.
● You can avail personal loans for 1 to 5 years, depending on your agreement with the lender.
Loans for Students:
● Education loans, on the other hand, are specifically designed to cover higher education costs, including tuition fees, living expenses, books and other academic expenses.
● Interest rates on education loans may be lower than those on personal loans as the government often subsidises them.
● These loans often come with a grace period known as a moratorium, where repayment only begins after the completion of the course.
Comparison: Personal Loans vs Education Loans
To choose between personal loans and a loan for students, it’s crucial to make an informed comparison.
● Personal loans typically have higher interest rates than education loans, primarily because they are unsecured.
● Education loans, being a targeted product, often have lower interest rates, especially for premier educational institutions.
● Personal loans usually have a shorter tenure ranging from 1-5 years, leading to higher EMI payouts.
● Education loans come with a longer repayment tenure, often up to 10-15 years after the moratorium period, resulting in smaller EMIs.
Flexibility of Use:
● Personal loans are unrestricted and can be used for any purpose, including non-educational expenses.
● The use of education loans is more regulated, intended solely for educational expenses.
Impact on Credit Score:
● Personal loans and education loans, if managed properly, can help in building a good CIBIL score by demonstrating responsible borrowing behaviour.
● Defaulting or delayed payment of either loan type will negatively impact the borrower’s CIBIL score.
The Eligibility Criteria
Like any other loan, both personal and education loans come with their set of eligibility criteria.
● Age: The borrower should be at least 21 years old at the time of loan application.
● Employment: The borrower must have a regular source of income, either through employment or self-employment.
● Credit score: A good CIBIL score of 700 and above is usually preferred for personal loans.
● Age: The student must have attained the age of majority at the time of loan application.
● Admission: Proof of admission to a recognised educational institution is required.
● Co-borrower: Most education loans require a co-borrower, who can be a parent, spouse, or sibling.
Understanding the tax implications of both personal loans and a loan for students is essential to ensure you are making the most of your borrowing options.
Personal loans do not offer any tax benefits under India’s current income tax laws.
Borrowers can avail tax benefits on the interest paid on education loans under Section 80E of the Income Tax Act.
The repayment structure differs for personal and education loans, with the latter typically offering more flexibility to the borrower.
The borrower has to start repaying the personal loan through Equated Monthly Instalments (EMIs) soon after the loan disbursement.
Education loans usually offer a moratorium period – a grace period during which the borrower is not required to repay. The repayment begins after the completion of the course or after getting a job.
Secured vs Unsecured Loans
Personal loans and some education loans are unsecured, meaning they don’t require collateral. However, high-value education loans may require collateral.
Deciding the Best Fit
Before deciding, consider your financial situation, future earning potential, and course duration. Remember, personal loans or a loan for students should suit your unique needs and circumstances.
Considering the Role of Financial Institutions
While the onus of choosing between a personal loan or an education loan lies on the borrower, the role of financial institutions cannot be undermined. Each bank or non-banking financial company (NBFC) has unique loan products, interest rates, and processing procedures.
Therefore, researching multiple lenders and their offerings can significantly influence your loan decision and repayment experience.
When financing your education, selecting the best option requires thoughtful consideration. It’s essential to conduct extensive research and evaluate your financial abilities before deciding between a personal loan or an education loan.