Higher education has become a necessity rather than a choice for the ones who want to have a successful future. But these days the cost of higher studies are rising at an extraordinarily fast pace. Higher studies can turn out to become expensive for some people, and if one wants to go abroad for it then it might be a dream for some. Many people take loans for meeting these expenses. Now some of us might be in a dilemma of whether to take an education loan or to take a personal loan for meeting the education expenses.
This confusion can be sorted out with the help of the following reasons that tell us that why an education loan is better than a personal loan:
Moratorium period is the period during the loan tenure when a borrower is not required to repay the loan. It is the waiting period before the regular EMI repayments begin.
In case of personal loans, the EMI repayments begin almost as soon as the loan is disbursed. This means that you have to start the repayment of both principal and interest immediately. It becomes difficult to repay the personal loan because there may be a time lag between completing studies and landing a job. So if you plan to take a personal loan for meeting the education expenses, then you should be prepared to start the repayment of the loan as soon as you take it.
In case of education loan, there is a provision for moratorium period. Moratorium period is usually either 6 months to 1 year after the successful completion of the course, or the time it takes the borrower to start working at a job, whichever is earlier. During the moratorium period, the bank will calculate the interest rate on a simple interest basis. Some banks also offer concessional interest rates to those who arrange to pay the interest during the moratorium period. So it becomes quite easier for students to repay the loan as they can arrange for the repayment during the moratorium period.
The loan tenure of personal loans is much less than that of education loans. Most education loans have a tenure ranging between 5 and 15 years as students cannot start paying the high EMIs just out of college. In case a student is unable to find a job in the moratorium period, he/she can request for an extension on the loan repayment tenure.
Whereas personal loans have a tenure ranging from 1 to 5 years. Personal loans can be extended up to 5 years and not beyond.
Tax benefits are available if you take an education loan. Repayment of an education loan is deductible under section 80E of the Income Tax Act. The yearly limit for deduction is Rs. 40,000 (for both the principal and the interest). Only loans are taken for higher education – full-time studies in any graduate or post-graduate, professional, and pure and applied science courses can claim a deduction. The deduction will be available for a maximum of eight years starting from the day you start repaying.
In case of personal loans, no tax benefits are available. So if you are planning to take a loan for tax benefits then education loans are suitable.
Loan interest rate is the most important factor to decide which loan to take – personal loan or education loan. Usually, education loans are cheaper than that of personal loans as education loans are offered at a much lower rate as compared to personal loans. In education loans, girl students get a concession of 0.5% in interest for higher studies in India as well as abroad. So it makes financial sense to go for education loan instead of a personal loan.
Interest rates for education loans range from 10.4% to 16.5% and interest rates for personal loans ranges from 12.5% to 16.6%.
Personal loans are approved based on the income details and financial history of the borrower and not over any fixed asset as security or collateral. Whereas in case of an education loan no security is required if the quantum of loan is up to Rs 4 Lakh. Above Rs 4 Lakh & unto Rs 7.50 Lakh suitable third party guarantee acceptable to the bank to be taken. Above Rs 7.50 Lakh, tangible collateral security of minimum value equivalent to the loan amount and interest accumulation during course & moratorium period, acceptable to the bank.
–So to sum up if you are taking a loan to meet the education expenses then you should opt for an education loan instead of a personal loan. But this decision entirely depends on your requirements and other reasons.