One of the biggest hurdles that stands between students and their dreams today is the rising cost of higher education. Both education loan and personal loan can help prevent lack of finances from becoming a hindrance to pursuing higher education. However, while deciding the source of funds, borrowers often get caught up in the dilemma of choosing between education loan and personal loan.
Let’s look at both options closely and figure out the right option on the basis of your requirement:
Lenders approve education loans on the basis of the institute, fees and other costs related to the course. You can avail an education loan up to Rs 80 lakh for studies in India, whereas for studies abroad it can be as high as Rs 2 crore. On the other hand, personal loan is usually capped at Rs 40 lakh. Given that there is no restriction on end usage of a personal loan, you can utilise it for covering other expenses like relocation expenses, cost of external coaching, etc. which may not be covered by the education loan lender.
Education loan can be availed at comparatively lower interest rate, ranging anywhere between 7.95% – 15.2% p.a. A few lenders extend additional 0.5% concession to girl students. Moreover, students can get further concession of 1% if they start paying off the loan during the moratorium period. On the other hand, your interest outgo can be higher if you opt for personal loan, ranging between 9.5% and 28% p.a. Visit online financial marketplace to compare interest rate offered for both types of loans. Choose one that’s in sync with your requirement.
Unlike a personal loan wherein loan repayment starts immediately by way of EMI, education loans come with a moratorium period of up to 12 months from the date of completion of course. This gives borrowers enough time to find a job, ensure regular income to repay the loan.
Moratorium period can be further extended under specific circumstances like medical emergencies, unemployment or during incubation period, if the student wants to take up a start-up venture after graduation, subject to approval of the lender.
The longer the tenure, the smaller the EMI amount, and vice versa. In case of an education loan, the loan tenure can go up to 15 years. Such a long tenure, along with lower interest rate, usually leads to lower EMI outgo. On the other hand, the shorter loan tenure of personal loans of up to 5 years, coupled with relatively higher interest rate, results in a higher EMI amount.
Tax exemptions available
Under section 80E, education loan offers tax benefits on the interest repaid for a maximum period of 8 successive years starting from the year in which you begin loan repayment, or until the interest is fully repaid, whichever is earlier. Remember that the principal component is not eligible for tax deduction. Tax exemptions are not available for the personal loan borrowers.
Education loan usually requires a co-applicant such as your parent or spouse. Lenders may ask for third party guarantor if the loan amount exceeds Rs 4 lakh. In addition to this, an additional collateral security may also be required for a loan amount exceeding Rs 7.5 lakh. Personal loan neither requires a guarantor nor collateral security for availing the loan.
Lower interest rate, longer tenure, moratorium period and tax benefits make education loans a favourable option for borrowers vis-à-vis personal loans. Consider opting for a personal loan if you do not get an education loan due to absence of co-borrower, guarantor, sufficient collateral, or in case you require a higher loan amount than what you are eligible for.
(By Gaurav Aggarwal – Director & Head of Unsecured Loans, Paisabazaar.com)