Personal Loan vs Education Loan: Which is Better for Funding Education Cost?

Quality education lays the foundation of a steady career and a better package. However, its ever-increasing cost has rendered it out of bounds for most people. As a result, most people have to finance their higher education through education loans from banks or NBFCs. However, those who cannot avail education loan due to lack of co-borrower, guarantor or sufficient collateral or due to poor ranking of the institute can consider applying for personal loan.

In this article, we have compared the features of education loan and personal loan for customers to help them understand which one may work well for them as compared to the other.

Loan Amount

Lenders approve education loans after the institute’s ranking, fees and other costs related to the course like hostel fee, cost of books, equipment, laptop, etc. The maximum education loan you can avail is Rs 1.5 crore, with some lenders offering higher loan amounts. On the other hand, the personal loan amount can usually go up to Rs 40 lakh, depending on the applicants’ repayment capacity and the cap on the maximum loan amount set by the lenders. As there is no end restriction, borrowers can also use the loan amount for covering their relocation expenses, external coaching expenses, etc. which may not be covered by the lender of the education loan.

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Interest Rate

As compared to personal loans, education loans can be availed at comparatively lower interest rates, usually starts from 8.05% p.a. A few lenders offer an additional 0.5% concession to female students. Students can get further concession of 1% if they start servicing the interest component during the moratorium period. Personal loans, on the other hand, are usually offered at 10.49% p.a. onwards. However, some public sector banks offer personal loans at lower interest rates. Hence, availing personal loans for financing education can increase the overall interest cost for the borrower.

Those availing personal loans for the purpose of higher education can visit online financial marketplaces like Paisabazaar to compare the personal loan interest rates offered by various banks and NBFCs based on their credit score, monthly income and other aspects of their credit profile.

Personal Loan Interest Rates offered by Top Lenders

Note: Interest rates as of 11 November 2024

Also, check your credit score before applying for either of the loans. You can avail a free credit report from each of the credit bureaus once a year. Alternatively, you can visit Paisabazaar to view your credit reports from multiple bureaus. Checking credit score at regular intervals will allow you to take corrective steps for improving your credit score and thereby, your chances of loan approval at lower interest rates.

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Margin Money

For education loans amounting more than Rs 4 lakh, lenders may not finance a certain percentage of your total education cost and thus, will have to be paid out of your own pocket. This amount can include your scholarship money too. In case of the personal loan, there is no margin money. Lenders will sanction the amount on the basis of your personal loan eligibility.

Repayment Period

Personal loan has shorter tenures usually extending up to 5 years, with a few lenders offering tenures of up to 7 and 8 years. Such short tenure along with the relatively higher interest rates, usually result in a higher EMI amount. Education loans, on the other hand, have repayment periods of up to 15 years and such a long tenure, along with lower interest rates, usually results in lower EMIs and higher EMI affordability for borrowers as compared to personal loan.

Moratorium Period

In personal loans, the loan repayment starts immediately after the disbursal. However, that isn’t the case with education loans as it comes with a moratorium period of up to a year from the completion date of the course or after 6 months of getting a job, whichever comes earlier. This means that in addition to the course period, borrowers are not required to pay the EMIs for a year, giving them enough time to find a job and ensure regular income to repay the loan.

Moreover, your lender can further extend the moratorium period 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.

Collateral/Guarantor

Education loan usually requires a co-applicant such as your earning parent or spouse. For education loans of up to Rs 4 lakh, lenders generally do not ask for collateral or third-party guarantee. Some lenders like HDFC Bank and Bank of Baroda extend this benefit for loan amounts of up to Rs. 7.5 lakh. However, for loan amounts exceeding Rs 7.5 lakh, borrowers will have to provide an additional collateral security to lenders in the form of property, bank deposit, mutual funds, insurance policies, etc. On the other hand, in case of personal loans, the requirement of a guarantor or collateral security is not mandatory for availing the loan.

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Tax Benefits

As per Section 80E of the Income Tax Act, education loan borrowers can claim tax deductions on the interest component of their EMI for up to 8 years after the commencement of EMI repayments. However, personal loan borrowers do not receive such tax benefits on loan repayment for financing their education. Additionally, only those borrowers who avail education loans from financial institutions listed in the Indian government’s official gazette are eligible for claiming tax deductions. Thus, prospective borrowers should first verify if the financial institution offering the education loan is approved by the Central Government through its official gazette when comparing loan offers from different lenders.

Which is Better?

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.