With the cost of higher education soaring, majority parents today opt for education loan either from banks or a non-banking financial institution. Getting a loan is no more a tough task provided you fulfill the desired eligibility criteria but the main concern is to choose a bank or NBFC. According to studies, NBFCs are outperforming banks and have given rise to an uptick of 15% customer satisfaction. But, loan schemes of banks like Kotak Mahindra Bank education loan scheme and other such have not failed to attract customers.
Hence, those planning to take an education loan and are in a dilemma as what to choose from must have a look at the pros of each below. Alongside, we have also mentioned the process of applying for an education loan and rules for the same.
Applying for an Education Loan
As a student enrolls in any university, not just he has to pay the course fee but also many other charges such as accommodation charges, exam fee, etc. All of this is covered when one applies for an education loan. This loan can be lent to the student himself. Even a parent, sibling, or guardian are applicable for the same. While almost all banks in India, offer loans for pursuing higher education in the country itself, they are a good few who offer education loans for studying abroad. Also, the loan is not at all course specific. Whether your child wishes to study a part-time vocational course or aims for engineering, architecture, medical, or even management alternatives, all of these courses are covered by the loan at both under graduation and post-graduation level.
Rules of an Education Loan
As per the guidelines of the Reserve Bank of India, the person applying for a loan should be a citizen of India and should have completed his higher secondary level schooling. The banks issuing the loan require some mandatory additional documents which are admission letter of the institution the student is seeking to take admission into, the fee structure of the course opted for, Class X and XII mark sheets from a recognized board.
There has been a fixed trend, for a loan up to Rs. 4 Lac there is no collateral requested by the bank and no margin money is required as well. However, for a loan amounting Rs. 7.5 Lacs and above require the submission of a collateral. For something between Rs. 4 lacs and Rs. 7.5 Lacs only a third-party guarantee is requested.
Another thing to keep in mind is that for universities in India 5% of the total amount has to be paid by the applicant himself, and ongoing overseas this margin increases to 15%. The rest of the amount is paid by the bank itself to the institution directly. On the issuance of an educational loan, the applicant is designated to a Marginal Cost of Funds based Lending Rate. Until 2017, the interest rate was observed to be 1.35% to 3%.
Will a Bank or NBFC be preferable?
For years now, people have relied on banks for most of their necessities, be it savings or taking loans. Thus, when it comes to choosing an NBFC for some purpose, people usually take a conservative approach. Here let’s see if NBFCs really a better option than banks or banks maintain the trust of their clients.
One of the fundamental points of choosing either of the two options has to be the interest each of them levies. Since Banks borrow money from common people their average cost of borrowing money varies between 5.5% and 6%, whereas Non-Banking Financial Companies (NBFCs) obtain money from banks or investors and hence their average cost of borrowing money is approximately 9.5 %. Accordingly to basic logic, more the average cost of borrowing money more will be the interest rate. Hence, in this aspect, a student must remember that on choosing an educational loan from an NBFC, the interest rate to be paid will be higher.
The next aspect parents look forward to while applying for an educational loan is the processing fee. A recurring trend suggests, that banks have a very low or even in some cases no processing fees on the other hand NBFCs mandatorily charge a processing fee of about 1% to 2 % of the entire loan amount.
The rate at which seats get filled at a university is incomparable. In such situations when an educational loan is needed on an urgent basis, the processing time of an NBFC must be taken into consideration, as banks take higher processing time.
However private banks are known to provide quick approval of loans and in the case of public sector banks, if the applicant has connections with a specific branch, he or she may get the loan approved quickly.
Income tax deduction
Once you have obtained a loan from a Bank then the applicant even the co-applicant would become suitable for income tax deduction under section 80E automatically. This simply means that the interest being paid to the bank can be a part of one’s non-taxable income. On comparing with the NBFCs, there are no clear income-tax exemption guidelines.
Repayment of the loan
NBFCs make you pay a certain amount decided before sanctioning the loan. This becomes an additional burden to the person on whose name the loan is issued. However, in the case of a bank, students don’t have to pay any amount while they are completing the course. The repayment period starts once the applicant earns a job.
In the case of pre-closure of loans, banks have to follow RBI’s guidelines and do not charge anything. However, NBFC’s do charge a pre-closure but is also capable of waiving off the same under certain conditions.
Statistics have revealed, about 89% of education loans are lent by public sector banks in comparison to 52% issued by NBFC’s. One of the primary reason could be that public sector banks have are easily accessible as they penetrate into both Tier 1 and Tier 2 towns, unlike NBFC’s that lend larger amount loans to those classes who can afford this.
To conclude with, opting for an education loan assists one in building a quality career and secure a happy life ahead. Taking one from either a bank or NBFC has its own pros and cons. While on one hand, banks may not approve an educational loan for unorthodox courses at the same time NBFC’s are much flexible in this aspect and also provide the client with additional services if the students choose to study overseas. If this is an advantage, then one must remember that NBFC’s have higher interest rates, processing fees, and loan repayment charges. Choose wisely!