Education loan or personal loan – which one to choose?

Gaurav Aggarwal

With the rising cost of education, taking a loan to fund higher studies has gained immense popularity. Here, students and their parents have two distinct choices – availing an education loan or a personal loan. Let’s weigh the two and discuss the parameters that should help one make a financially sound decision.

Loan amount: This depends upon students’ needs and financial condition. In case of an education loan, a lender will grant you a loan amount depending on the fees and costs involved in doing the educational course. This amount can vary from Rs 50,000 to Rs 1.5 crore. For short term or skill-based courses, loans as small as Rs 5000 are also provided. In comparison, the loan amount for a personal loan is dependent on the borrower. A personal loan taken in this situation can cover for other expenses of the student and the families, like costs involved in re-locating to another city, travel expenses etc. So, students who need funds to cover expenses other than the course fee may consider personal loans.

Interest rate: Interest rates for education loans are generally lower than personal loans. The interest rate for education loan usually ranges between 8.30% to 24%. Personal loan rate ranges roughly between 10.99% and 24%. Also, a concession of about 0.5% is available for girls in case of education loans. If the student starts repaying the education loan during the moratorium period, then he/she also gets a concession of 1% in rate of interest. Hence, before making a decision visit online marketplace platforms to compare the interest rates on offer for both types of loans.

Moratorium period: This is a big factor that usually affects a student’s decision regarding the choice of loan. There is no moratorium period in case of personal loans, which means repayment of principal plus interest starts immediately. Whereas a moratorium period of 12 months from date of completion of course is available in education loans and this can even get extended too in cases like medical emergencies, unemployment etc. upon the approval of bank. The repayment period of loans taken for vocational training and skill development usually starts six months after the completion of the loan. Education loans, hence, prevents students and their families from the burden of repaying the loan immediately and helps students settle into a job before the EMIs start.

Loan tenure: The period for which a loan is granted impacts the EMI amount. In case of education loans, loan can be granted for a period of upto 15 years. For some short term or skill/training courses, education loans are provided for up to 7 years. This, along with a lower interest rate, usually leads to lower EMIs. However, in case of personal loan, it is very difficult to get a loan approval for more than five years and the interest rates are also generally high, resulting in higher EMIs.

Tax exemptions available: Education loan offers tax benefits under section 80 E from the day the student starts repaying for a maximum period of eight years. It should be noted that only the interest component is deducted from the taxable income. However, no such tax benefits are available on personal loans.

Guarantor/ collateral: Education loans usually require a co-applicant like a parent or spouse. In general cases, a third party guarantor may be required when education loan amount exceeds Rs.4 lakh and additional collateral may also be required when the loan amount exceeds Rs 7.5 lakh. However, to avail a personal loan, you need neither a guarantor nor collateral security.

Hence, prefer education loan due to lower interest rates, longer tenure availability, tax benefits and moratorium period. A personal loan can be availed if the applicant fails to get an education loan due to the absence of co-borrower, guarantor or sufficient collateral or he needs a bigger loan amount than what he is eligible for in case of an education loan.