Education Loan Comparison: A Detailed Guide

The education loan market is on an upward swing and has seen a growth of 34% - from INR 16,800 (in FY 2016) to INR 22,550 crore (in FY 2019). Public sector banks, private banks, NBFCs and private entities are all vying for their share in this growing education loan market. As a result, they offer different kinds of education loans at varying terms and conditions, something that often confuses prospective loan seekers. In this blog, we will try to clear all confusion surrounding education loans by doing a detailed comparison of education loans available in the Indian market. So, without any ado, let us jump right into the discussion.

Secured Vs Unsecured Education Loans

If you are a prospective education loan seeker, you might have heard of terms such as Secured education loan or education loan with or without collateral. Let us try and make these terms simple for our readers.

Secured Education Loan:

A secured education loan also referred to as an education loan with collateral, is one where the borrower has to pledge an asset when taking a loan. This asset can be a tangible asset such as land, property, or apartment, or an intangible asset such as Fixed Deposits, Government Bonds, Mutual funds, etc. Nationalized banks, private banks, and NBFCs ask for collateral for loans exceeding a certain amount. The lender will make use of this collateral to generate funds in case the loan becomes a Non-Performing Asset (NPA).

Unsecured Education Loan:

An unsecured education loan or an education loan without collateral is one where the bank does not ask for any security when sanctioning the education loan. Instead, the bank requires the borrower to take an education loan with a co-applicant. A co-applicant is someone who takes equal responsibility for loan repayment. A co-applicant can be someone with a decent CIBIL score and monthly income.

Difference Between Secured and Unsecured Education Loan

Loans from Banks Vs NBFCs

Banks, private and public, and NBFCs are the financial institutions that give education loans in India. Before discussing the differences between an education loan from a bank and NBFC, let us first understand how these financial entities raise funds that are loaned to borrowers.

Banks, whether public or private, borrow money from people (who are given an interest between 3.5% to 7% on their fixed deposit and saving accounts) and give it on loan to borrowers. NBFCs, on the other hand, borrow money from banks or other investors and then give loans. As is obvious, the rate of interest offered by banks would be lower than NBFCs - all other parameters being the same.

Let us now look at the differences between the loans offered by banks and NBFCs

Difference between the loans offered by banks and NBFCs:

Key Points for Comparing Education Loan

Now that our readers have got a detailed understanding of differences between lenders and types of education loans, let us also list down some points that should be kept in mind when comparing loans -

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  Rate of Interest - This tops our list of loan comparisons, simply because it plays a huge role in the total amount that you will eventually repay to the bank. Even a 1% difference in ROI has a substantial impact on your total interest paid, so compare the ROI before signing on any dotted line. Students should also check whether their ROI is fixed or floating.

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  Moratorium Period - Most lenders offer a moratorium period during which the student does not have to make any loan repayment. The duration and conditions of the moratorium period vary from lender to lender, hence compare them well.

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  Processing Fee - Comparing the processing fee is also a wise move as a lender can charge anywhere between 0% to 5% of the loan amount as a processing fee. Imagine paying INR 2 lakhs as a processing fee on a loan amount of INR 40 lakhs with a processing fee of 5% when you could have got it at a much lower or no processing fee.

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  Penalty on Prepayment - This is another important comparison on our list. Lenders charge a prepayment penalty between 2% and 4% on education loans. Since many students wish to pre-pay their loan amount to avoid future interest amounts, having clarity on prepayment charges will help them plan their repayments better.

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  Interest Subsidy Scheme - Students would also compare if the loans they are comparing come under the interest subsidy scheme.

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  Loan Tenure - A longer loan tenure would mean an increase in the total interest paid to the bank. Hence opting for a shorter loan tenure would be the wiser option.

 Students can read here for a more detailed understanding of the above-mentioned tips. Still have doubts when comparing education loans? In that case, get help for free from GyanDhan for all your education loan-related queries now.