Education loan is a unique service in the sense that it is not bound by the payment structure like other loan types like home loan, car loan or personal loan. A student usually starts paying it off when they find a job that can fund repayment of the loan. For many students, an education loan is the next big step in laying the foundation for their career. Often students take an education loan to study abroad, which gives them a wider horizon in the long run. According to the CRIF High Mark analysis, about 90 percent of education loans are taken from public sector banks on value and volume basis. With the 10th issue released in August, graduates are looking for higher studies and that’s where an educational loan comes in.
Banks are not the only option for aspiring students. You can take the traditional route and opt for bank loans, but there is also an option to borrow loans from non-banking finance companies (NBFCs). Both have their advantages and drawbacks, depending on your financial situation and outlook.
An important point is divergence interest rates. Banks have a somewhat standardized interest rate that maintains some form of uniformity because education loans taken after April 2016 are linked to the bank’s marginal cost based lending rate (MCLR). An NBFC does not maintain this concept of MCLR, so they often determine their interest rates based on market competition and cost of operation among other factors. This can lead to higher interest rates on education loans from NBFCs.
In terms of loan repayment, both banks and NBFCs do more or less the same thing. Most of the education loan lenders have such a huge gap that the student can complete the course and start repaying the loan after getting a job. The main advantage of taking an NBFC educational loan as compared to banks would be the flexibility to study a wide range of specific subjects. However, as per the CRIF High Mark analysis, the top lenders of educational loans by volume in annual disbursements in the last 4 to 5 years are public sector banks. It has also shown that private banks have higher interest rates for education loans as compared to public sector lenders.
Banks have a choice when it comes to getting an education loan. One can apply for education loan for top rated university, to study abroad or to study as only domestic higher education institution. Whichever route you choose, it should be clear to the bank whether that institution is loan-worthy, the employability of the student after that course and other factors that are determined on a case-by-case basis. Banks usually tweak their terms for loans around these factors.
The difference between banks and NBFCs in this regard is that, while banks are a little more rigid with their loan approval process, an NBFC can be a bit more flexible. Both banks and NBFCs cover most of the common expenses incurred during higher studies like fees, transportation, security deposit, money for books etc. The key difference here is that banks often impose caps on such funds. NBFCs on the other hand offer a wider range of more flexible services and even provide add-ons for students who wish to study abroad.
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