One of the biggest hurdles between students and their dreams today is the rising cost of higher education. Both the education loan and the personal loan can help ensure that financial resources do not become an obstacle to higher education. When deciding on the source of funding, however, borrowers are often faced with the dilemma of choosing between an education loan and a personal loan.
Let’s take a close look at both options and find the right option based on your requirement:
Lenders approve educational loans based on the institute, fees, and other course-related costs. You can get an education loan up to Rs 80 lakh for studying in India, while it can be up to Rs 2 crore for studying abroad. On the other hand, a personal loan is usually capped at Rs 40 lakh. Since there is no end use limit on a personal loan, you can use it to cover other expenses such as moving costs, outside coaching costs, etc. that may not be covered by the education loan lender.
The education loan can be used at comparatively lower interest rates, which are between 7.95% and 15.2% pa. Some lenders give female students an additional 0.5% discount. In addition, students can receive a further 1% discount if they start repaying the loan during the moratorium period. On the other hand, your interest expenses can be higher if you opt for a personal loan, between 9.5% and 28% pa Visit the online financial marketplace to compare the interest rates offered for both types of loan. Choose one that suits your needs.
Unlike a personal loan, where loan repayment begins immediately through EMI, education loans have a moratorium period of up to 12 months from the date the course was completed. This gives borrowers enough time to find a job and ensure a steady income to repay the loan.
The moratorium period can be extended in certain circumstances such as medical emergencies, unemployment, or during the incubation period if the student wishes to start a start-up business after graduation, subject to the approval of the lender.
The longer the tenure, the smaller the EMI amount and vice versa. In the case of an educational loan, the loan term can be up to 15 years. Such a long tenure, along with a lower interest rate, typically results in lower EMI output. On the other hand, the shorter personal loan repayment term of up to 5 years coupled with a relatively higher interest rate translates into a higher EMI amount.
Tax exemptions available
Pursuant to Section 80E, the Education Loan provides tax benefits on the interest repaid for a maximum of 8 consecutive years from the year you begin loan repayment or until the interest is repaid in full, whichever is earlier. Remember that the main ingredient is not tax deductible. Tax exemptions are not possible for private borrowers.
Surety / securities
An education loan usually requires a co-applicant such as your parents or spouse. Lenders can request a third party guarantor if the loan amount exceeds Rs 4 lakh. Additionally, additional security may be required for a loan amount greater than Rs 7.5 lakh. The personal loan does not require a guarantor or security deposit to draw on the loan.
Lower interest rates, longer terms, moratorium periods and tax breaks make education loans a cheaper option for borrowers than personal loans. Consider opting for a personal loan if you cannot get an education loan because you do not have a co-borrower, guarantor, or adequate collateral, or if you need a loan amount greater than you are entitled to.
(By Gaurav Aggarwal – Director & Head of Unsecured Loans, Paisabazaar.com)