Student Loan vs Personal Loan: Where to bet to finance your higher education?

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Various studies suggest that students rely on bank loans to cover the cost of their studies. It is imperative to find the right source of funding for higher education in order to obtain lower interest rates, favorable terms and other benefits. Borrowers are often faced with the dilemma of choosing between student loans and personal loans for education financing.

Difference Between Student Loan and Personal Loan

We offer a point-by-point analysis to help borrowers weigh their options based on their needs and decide which type of loan is best for them to meet their academic aspirations.

Coverage of funds – One of the biggest benefits of a student loan is cost coverage. The loan amount that borrowers can get ranges from INR 7.5 lakhs to INR 1.5 crore. While the loan amount that borrowers can obtain under a personal loan is a maximum of INR 25 lakhs, which in exceptional cases can be extended to INR 40 lakhs. If the purpose of the loan is education abroad, an education loan would better serve that purpose.

The interest rate – Student loan interest rates start at 8.45% for secured loans, and for unsecured loans the interest rate starts at 10.5%. Unsecured student loans offer the possibility of a higher interest rate, up to 14%. However, the interest rate on a personal loan ranges from 10.5% to 24%. In addition, student loans come with an additional interest reduction for girl borrowers of 0.5%, which is not available for personal loans.

Fiscal advantages – There is no tax advantage on personal loans. However, spending on education through a student loan helps borrowers save on income tax. Borrowers may claim a deduction for interest paid on a loan taken out to pursue higher education under Section 80E of the Income Tax Act 1961. above INR 7 lakhs is only 0.5%, if the funds are remitted through an education loan. The TCS on funds contributed from any other source is 5%.

Government interest subsidy programs – In addition to the above tax advantages on an education loan, several interest subsidy programs help reduce the interest burden on borrowers. Central Sector Interest Grant Scheme, Padho Pardesh Interest Grant Scheme and Dr. Ambedkar Central Sector Scheme are some of the few schemes that borrowers/students can avail at the start of their loan. ‘studies. These plans are only eligible for student loans and not personal loans.

Moratorium period – The moratorium period is the period during which the borrower does not have to make a repayment. In a student loan, the moratorium period is generally one course period + 12 months. Whereas in a personal loan, there is no moratorium period, and the EMI starts right after the disbursement of the loan amount.

Penalty for prepayment – Prepayment is a good way to save on interest payments. Lenders do not charge any penalty for early repayment of a student loan. However, personal loan prepayment penalty charges can be 2.5% or more, plus GST. The exact penalty depends on the amount of the loan and the lender.

Term of the loan – Another advantage of a student loan is the 10-year loan term compared to the shorter 5-year loan term in a personal loan. A longer loan term is beneficial to students as EMI becomes manageable.

When to opt for a personal loan?

Personal loans are ideal when the borrower is looking for small amounts of money for a shorter term. The process for a personal loan is quick and easy, requiring minimal documentation. Credit score is the key factor in determining eligibility for a loan. Depending on the credit score, a borrower may be pre-qualified for a personal loan.

Although there are many avenues that borrowers can explore, student loans are the clear winner among them for financing higher education whether in India or abroad. Personal loans are best suited when borrowers are looking for a quick financing solution for immediate expenses.

(Author: Mr. Ankit Mehra CEO and Co-Founder of GyanDhan)

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