Higher education has become necessity for complete and successful life. And cost of education is increasing fast. In fact, studying at reputed institutions is already high cost. In this case, Education loan or Personal Loan, which one makes greater sense? Let’s compare personal loan and education loan on various aspects and see what makes for better choice in this case.
Compare personal loan and education loan for higher studies
Higher studies are expensive, especially in foreign universities. So, many people take loans to pay for these courses. Also, education loans are available. But you can also take Personal Loan for higher studies. Following are some key reasons why education loan is more suitable to finance your education than personal loan.
This is big thing that affects student’s decision regarding choice of loan. It is defined, that during loan tenure when borrower is not required to pay loan. It is waiting period before regular EMI repayments begin. In case of personal loans, repayment begins as soon as loan is pay out.
But there is no moratorium period in personal loans, which means repayment of principal plus interest starts immediately. Moratorium period of 12 months from date of course completion is available in education loans. And this can be extended in cases like medical emergencies, unemployment etc. by bank approval. See How to make best use of your tax saving through investment
Moratorium Period for short term
Loans repayment period is taken for vocational training and skill development starts six months after completion of loan. Hence, Education loans, prevents students and their families from burden of repaying loan immediately and helps students settle into job before EMIs start.
During moratorium period, bank will calculate interest rate on simple interest basis. Some banks also offer concessional interest rates to those who arrange to pay interest during moratorium period. In case of personal loans, no waiting period is available and your EMIs start immediately.
Repayment loan tenure
This is biggest advantage of an education loan. You can start repaying loan after you finish your course and get job. EMIs start one year after you complete your studies or six months after you land a job, whichever is earlier. Most education loans can be granted to repay up to 15 years period. For some short term training courses, education loans are given up to 7 years with low interest rate
But in personal loan, it is difficult to get loan approval for more than five years and interest rates are also high with higher EMIs. But you must keep in mind that longer tenure will increase your total interest payouts. Personal loans are available for period up to 5 years and not beyond.
When you decide to opt for any loan, most important factor which you must compare is interest rate. Usually, education loan is offered at lower rate than personal loan. This rate depends on multiple parameters and keeps fluctuating. For education loans, rate range between 8.30% to 24 percent. But personal loan rate ranges between 10.99% and 24%.
Also, for girls there is concession of about 0.5% is available in education loans. Additionally, processing fees applicable to an education loan are lower than personal loan. If you start repaying education loan during moratorium period, then you also get concession of 1% in rate of interest. Thus, before making decision compare interest rates on offer for both types of loans.
In addition, it may not be easy to get personal loan of very big amount. Also, it depends upon student’s needs and financial condition. In case of an education loan, lender will grant you loan amount depending on fees and costs involved during educational course. This amount varies from Rs.50, 000 to Rs 1.5 crore.
For short term courses, loans are provided as small Rs. 5000. In comparison, loan amount for personal loan is dependent on borrower. In this situation, personal loan taken to cover other expenses of student and families like re-locating to another city cost, travel expenses etc. So, students who need funds to cover expenses other than course fee may consider personal loans.
There are no tax benefits for repayment of personal loan. On other hand, interest payment for an education loan eligible for tax deduction under section 80E of Income Tax Act. Tax deduction can be claimed only loan repayment has started. Also, it is available for 8 years period, so if your loan continues beyond this period, no tax benefits will be available.
You must note that only interest is deducted from taxable income. Point to note is that only borrower gets benefits. Therefore, if father takes loan for children education, he gets tax benefit. However, if education loan has been taken by son but father makes repayment, father won’t get any tax benefit.
On other hand, Education loans need co-applicant like parent or spouse. You may even need to provide security. In general cases, third party guarantor may be need when education loan amount exceeds Rs.4 Lakh.
Additional collateral may also be required when loan amount exceeds Rs. 7.5 Lakh. However, to avail personal loan, you need neither guarantor nor collateral security. Also read Top up Loan is better option for existing home loans
Which is Good Choice?
In cases where loan cost has borne by student, then personal loan is not an option. You had to go with an education loan. But education loans and personal loans for higher studies offer funds you need. So, before you apply for loan of your choice, keep compare of each in mind. Then analyze them against your own requirements. In this case, there is financial support from family. EMIs can be paid during course period.
Hence, prefer education loan due to lower interest rates, tax benefits too, an education loan is super choice. Personal loan can be availed if applicant fails to get an education loan due to absence of guarantor or collateral or you needs bigger loan amount than when you are eligible for in case of an education loan.