Education Loan Vs Personal Loan: Where To Invest For Your Higher Education?

Difference between education loan and personal loan

We bring you a point-by-point analysis to help borrowers weigh their options as per their needs and decide which type of loan is better for them to meet their educational aspirations .

Fund’s coverage One of the biggest benefits of an education loan is the cost coverage. The loan amount that borrowers can avail ranges from INR 7.5 Lakh to INR 1.5 Crore. Whereas in personal loan borrowers can get a maximum of Rs 25 lakh, which can be increased to Rs 40 lakh in exceptional cases. If the purpose of taking loan is education abroad, then education loan will serve that purpose better.

Rate of interest – The interest rate in education loans starts from 8.45% for loans with collateral, and for loans without collateral, interest rates start at 10.5%. Unsecured education loans run the possibility of a higher interest rate of up to 14%. However, the interest rate on personal loans ranges from 10.5% to 24%. In addition, education loans come with an additional interest concession of 0.5% for girl borrowers, which is not available in personal loans.

tax benefits – There is no tax benefit on personal loan. However, spending on education through education loan helps borrowers save income tax. Borrowers can claim deduction of interest paid on loans taken for pursuing higher education under Section 80E of the Income Tax Act, 1961. Not only this, under the Liberalized Remittance Scheme (LRS), Tax at Source (TCS) is collected on the amounts. If the funds are remitted through education loan, then over INR 7 lakhs is only 0.5%. TCS on money remitted through any other source is 5%.

Government Interest Subsidy Schemes – Apart from the above tax benefits on education loans, several interest subsidy schemes help in reducing the interest burden on the borrowers. Central Sector Interest Subsidy Scheme, Padho Pardesh Scheme of Interest Subsidy, and Dr. Ambedkar Central Sector Scheme are some of the schemes that borrowers/students can avail at the beginning of their education loan. These schemes are only eligible for education loan and not for personal loan.

moratorium period – The moratorium period is the period when the borrower does not have to make any loan payments. In an education loan, the moratorium period is usually a course duration + 12 months. Whereas in a personal loan, there is no moratorium period, and the EMI starts right after the disbursement of the loan amount.

Prepayment Penalty – Prepayment is a great way to save on interest payments. Lenders do not charge any penalty charges in case of prepayment of education loan. However, personal loans can have a prepayment penalty charge of 2.5% or more plus GST. The exact penalty fee depends on the loan amount and the lender.

credit period – Another advantage of education loan is the loan tenure of 10 years as compared to the shorter loan tenure of 5 years in personal loans. The longer tenure of the loan is beneficial for the students as the EMI becomes manageable.

When should you opt for a personal loan?

Personal loans are ideal when the borrower is looking for a small amount for a short tenure. The process of personal loan is easy and fast, requiring minimal documents. Credit score is an important factor in determining eligibility for a loan. Depending on the credit score, a borrower may pre-qualify for a personal loan.

While there are many avenues that borrowers can explore, education loans for higher education are the undisputed winners, be it in India or abroad. Personal loans are more suitable when borrowers are looking for a quick money solution for immediate expenses.

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