Education Loan Vs Personal Loan: Here’s What Works Best While Funding Higher Education Photo credit: Getty Images
New Delhi: As parents, securing and saving for the little one is undoubtedly one of the most important financial goals. The ever-increasing cost of higher education isn’t the only reason you as parents may not be able to save enough. Sometimes you can even run out of funds when you start saving early.
But, in such a situation, what can help make your child’s dream come true is a loan. While the student loan, as well as the personal loan, can be used to fund higher education, here’s a look at what works best for your needs.
Amount of the loan
Usually, the lenders approve the loans based on some factors like institute, fees and other related costs.
However, the only advantage of personal loans over student loans is that there is no restriction on the use of the amount. So, in this case, it can also be used as the cost of relocation and other external expenses.
Gaurav Aggarwal – Director and Head of Unsecured Loans, Paisabazaar.com said: “The loan amount in the case of personal loans is usually up to Rs 25 lakh depending on the credit profile and seniority of the applicant. Some lenders also claim to sanction loans of up to Rs 40 lakh. In the case of student loans, the loan amount can go up to Rs 80 lakh for courses offered in India and Rs 2 crore for study abroad .
Student loans are relatively cheaper in terms of interest rates. The interest rates for these loans can range from 7.95 percent to 15.2 percent per annum. Whereas, if you opt for a personal loan, the interest outflow may be higher, ranging between 9.5 and 28% per annum. In addition, it should be noted that some lenders offer an additional 0.5% concession to female students on student loans. And students can get an additional 1% reduction if they start repaying the loan during the moratorium period.
Naval Goel, CEO and Founder of PolicyX.com, said, “Usually a student loan is available at a much lower rate than a personal loan. Therefore, it makes financial sense to take out an education loan instead of a personal loan to finance your higher education. In addition, the processing fees applicable to a student loan are lower than those applicable to a personal loan.
term of the loan
The loan terms for an educational loan and a personal loan vary. Aggarwal said: “Personal loans are generally available for a maximum term of 5 years, with some lenders offering terms of 6-7 years. In the case of education loans, most lenders offer a maximum term of 15 years. years.
Tax exemptions available
The interest component repaid by student loan borrowers is also eligible for a tax deduction under section 80E. However, this tax deduction is only available for 8 years from the start of loan repayment. Therefore, borrowers should aim to complete their student loan repayment over 8 years to get the most benefit from the tax deduction.
However, it should be remembered that the principal component or the loan amount is not eligible for a tax deduction. And, in the case of a personal loan, there are no tax advantages available.
The student loan usually requires a co-applicant such as your parent or spouse. Lenders can apply for a third party guarantor if the loan amount exceeds Rs 4 lakh.
Also, according to the rules of the Association of Indian Banks (IBA), banks are required to take collateral if the loan exceeds Rs 7.5 lakh. This could take the form of land, buildings, government securities, public sector bonds, NSC (National Savings Certificate), KVP (Kisan Vikas Patra), insurance policy- life, gold, stocks, mutual fund units, bonds, bank deposits in the name of the student / parent / guardian or any other third party.
But some banks offer higher unsecured loan amount for elite colleges like IIT, IIM, ISB and others.