Saturday, 31 March 2018

Personal Loan VS Educational Loan

As the cost of education rises, it becomes difficult to fund higher studies from one’s own pocket. That is why taking loans to pay for the college fee is becoming quite common. The two most common financial options that one has are personal loans and education loans. There are different parameters based on which one can decide which option best suits one’s situation. If you too are seeking a loan for higher studies, this article will help you compare these two choices and help you make a sound financial decision.
An education loan is favoured because of the following reasons.
1.      Moratorium period
This period is referred to the time during the loan period when the borrower is not required to pay the instalments. In case of education loan there is a provision of moratorium period. The repayment begins 1 year after the completion of course or 6 months after one gets a job whichever is earlier. The interest during the moratorium period is also calculated on simple interest basis and added to the principal outstanding. You do have an option of paying the interest while you are studying if you have the resources to do so. But in case of personal loan there is no waiting period. The payment of regular EMIs begin as soon as the funds are disbursed. This essentially means that someone needs to shoulder the burden of repayments (on the borrower’s behalf) till the time one is studying and is without a job. In case your parents or relatives are not in a position to do this, personal loan no longer remains a choice. An education loan is better from this aspect, as it allows sufficient period to a person to settle in a job before the burden of EMI starts.
2.      Interest rate
An important factor that is taken into consideration while choosing among different loan options is the cost of borrowing. Since education loans have a specific purpose of providing a financial backing to students, they usually have a lower interest rate than the personal loans. Axis bank personal loan interest rate varies from 15-24% whereas education loan interest rate is between 10 to 13%. The processing fee is also lower in case of education loan. Hence it makes financial sense to go with this option.
3.      Loan tenure
Personal loans are usually offered for a period of maximum 5 years. Whereas education loan tenure goes up to 10 years. A longer tenure means that one can have lower EMI amounts which can be easy on one’s pocket.
4.      Loan amount

It is easy to get a personal loan of 4-5 lakhs, but if the education cost is much more than that, then personal loans sometimes not even remain an option. Maximum amount of axis bank personal loan is Rs 15 lakhs. One can get an education loan of Rs 50,000 to 1 crores depending on the kind of course one has enrolled for. Longer tenure of education loans helps in making the EMIs affordable even if the loan amount is high.

5.      Tax benefits

Personal loans do not offer any tax benefits. Interest payment on education loan qualifies for tax deduction under Section 80E of Income tax act. This benefit can be claimed after the loan repayment starts and for a period of 8 years. Such benefits reduce the total cost of taking loans.

But education loan comes with its own set of disadvantages. There are a lot of formalities during processing, and it takes a long time before the funds get disbursed. Banks have stringent eligibility requirements. They ensure that the applicant’s name is not in the loan defaulters list. They check the CIBIL score of the individual to analyse his past credit behaviour. With personal loans one can get funds instantly. If you meet the requirements one can get the loan within 3 days. There is no restriction on how the money is spent.

Weigh the pros and cons of both these options and consider which factors are more important to you considering your personal situation. In case your family can support the EMI payments till the time you study and the loan amount isn’t too high you can consider personal loan. However from the point of view of interest rates, tax benefits and loan tenure an education loan is a better choice.

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