Education loan has become crucial as the cost of higher education, whether in India or overseas, has been rising. It comes in handy when students face a financial crunch and at times have to put their property and other assets at stake to fund their education dream. While there are so many options available in the market ranging from public sector banks, private sector banks, and NBFCs to fintech companies, at times it becomes difficult to choose the best option as the cost can be just one of the several components to consider.
Here is a list of things which could play a crucial role in determining the right loan product and the right lender.
First is the interest rate offered by various lenders. “If you take an education loan from public sector bank then the average interest rate starts at around 7.75 per cent. In the same private sector bank, the interest rate starts from around 10.5 per cent. So clearly public sector banks are a good option. But when it comes to process key, you should also pay attention to that because comparatively there is very fast processing in private banks and NBFCs,” says Ankit Mehra, CEO and co-founder of GyanDhan.
Now apart from the type of bank, there are other factors on which interest rate depends. Like which course you are doing, from which institute you are doing, and how much is your credit score, among other things.
“Firstly, students should check whether the university/institute has tie-ups with the banks or NBFCs for education loans. In several cases, such tie-ups help in faster loan processing and lower overall costs to the students. Additionally, the experience of disbursements can be quite seamless and hassle-free. Lenders recognized by universities are usually vetted quite well based on their reputation and service mindset and take extra steps in helping the student in securing the best loan option,” says Ashwini Kumar, General Manager (India) and Vice President, MPOWER Financing.
Moreover, interest rates on education loans can be floating or fixed. For floating rate products, the interest rate consists of two parts: Base rate and margin. Base rate is a benchmark rate which could be LIBOR (London Interbank Offered Rate), or MCLR (marginal cost of funds-based lending rate). The margin is added to the benchmark as per customer-level risk assessment.
“Base rate changes over time depending on the market conditions. With the expectation of central banks raising their rates, base rates will increase in the future which will lead to a proportionate increase in the rates offered by the lenders. Fixed interest rate loans will be unaffected by the rise in interest rates. However, fixed-interest loans also have reset clauses at times which, if present, will result in an increase in interest rates going forward,” says Mehra.
Kumar adds, “A variable-rate product may, in some instances, offer a lower interest rate, but during the life of the loan, it has a high probability to be higher than the fixed rate and at levels, which can make the fixed rate much lower than the variable one. Remember, your valuable time for education, learning, networking, absorbing a multi-cultural and diverse environment should not be marred by the stress of rising variable rates - a fixed rate offers necessary peace of mind, especially while you are in school.”
Another important aspect to look for is the lender’s expectation in lieu of the loan. For example, secured education loans are the cheapest source of funding as the estimated risk in a secured education loan is lower because of the collateral pledged.
“Conventional wisdom pushes for a collateral or other assets like a home, land, etc. or a cosigner who cannot stand as guarantee against the loan. Modern and savvier ways of lending have allowed the student to free their parents, family or friends from the stress of obligation and take on the loan on themselves without a collateral or a cosigner - purely based on their own academic potential, this is an important variable that the student should consider as part of their search for a reliable loan provider,” says Kumar.
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