Personal Loan vs. Educational Loan: Ideal Means to Fund Your Higher Studies

In the present day scenario, higher education from a prestigious institute has become extremely important, especially if one is looking for a promising career. However, a professional degree or a diploma can often cost Lakhs of rupees. Since you may not have such a substantial amount set aside for this purpose, you can take external help in the form of a Personal Loan or an Educational Loan.

Let us take a quick look at the basics of each of these loan types, and compare to find out which of these is an ideal one for you.

Personal Loan

A SBI Personal Loan or any other personal loan is essentially an unsecured credit offered by Banks and NBFCs to individuals with a steady income stream. The loan is generally provided for up to 5 years and is distinguished by the fact that it has no restrictions regarding the end-use of the loan amount.

Education Loan

An Education Loan is an unsecured loan designed to aid students in the payment of a fee for post-secondary education, associated costs, including tuition, books, other study materials as well as living expenses. Usually, a Long Term Loan, the distinctive aspect of this loan is that the loan repayment begins only after 6-12 months of the completion of the education.

Personal Loan vs. Educational Loan

Now that we understand the fundamentals of Personal Loan and Educational Loan let us understand the difference between them based on some relevant aspects.

• Credit Score

Given that both Personal Loan, as well as Education Loan, are unsecured loan type, the lender primarily assesses borrower’s credit history to evaluate their creditworthiness. A Credit Score of 700 or above usually guarantees hassle-free approval of the loan application in both cases.

• Eligibility Criteria

One of the pre-requisites of a Personal Loan is that the borrower must either be a salaried individual, a self-employed professional or a business owner, with a minimum experience of 2 years. The borrower should enjoy a steady stream of income and must be between 21 and 65 years of age.

To qualify for an Educational Loan, the borrower must be a resident of India, with admission in one of the top colleges/institutions recognised by UGC or AICTE, and alike. The candidate must be between 18 to 35 years of age. The loan can only be procured to pursue a Graduate or Post-Graduate Degree or a Post-Graduate Diploma.
As you may have guessed, a Personal Loan usually needs to be obtained by the parent or guardian of the student. While an Educational Loan can solely be obtained by a student if the student is pursuing a full-time course. It is mandatory to have a co-applicant such as a Parent, Guardian, Spouse, or Parent-in-Law for procuring the loan.

• End-Use

The funds obtained through a Personal Loan can be freely used for one or more purposes such as sponsoring the child’s education, home renovation, medical expenses, important life events such as weddings, etc. Hence, a Personal Loan can prove to be of help when the borrower is required o fulfil more than one financial obligations.
However, when one opts for an Education Loan, they can only use the disbursed amount to meet the expenses which have a direct correlation to the educational course. These expenses include tuition fee, laptop, and living expenses, amongst others.

• Interest Rates

Personal Loans often prove to be on the more expensive side, owing to their high interest rate ranging from 10.50% to 25%.

Education Loans, on the other hand, comparatively attract lower interest rates, usually ranging from 8.60 to 13.70% for education in India, and 9.50% onwards for education outside India.

• Loan Disbursal

Personal Loans have earned quite a reputation with respect to quick disbursal times, which can be as low as 3-5 days from the date of loan approval. The amount is debited into the borrower’s account, and can then be used be for meeting any financial obligation, as per the borrower’s discretion.

In the case of Education Loan, the loan amount is transferred in the account of the educational institution, after which the office can use the money to cover the tuition fee and other related fees. That being taken care of, the borrower can claim the remaining fund to meet their living expenses.

• Instalments

Both Personal Loans, as well as Education Loans, are required to be repaid in the form equated monthly instalments (EMIs).

In case of Personal Loans, the borrower needs to start repaying the loan immediately after the disbursal of the loan amount.

Distinctively, in case of an Education Loan, the borrower only needs to repay the loan once the course for which the loan was obtained is complete. In fact, even after the completion of the course, the borrower enjoys a period of 6 to 12 months, before starting the loan repayment. This period from the date of loan procurement to the date when the repayment begins is known as the Moratorium Period. If need be, the borrower may repay the interest component during this period, in a bid to reduce the financial obligation in the future.

• Tax Benefits

Unfortunately, there are no tax benefits which one can avail on Personal Loans availed to sponsor a child's education.

In case of an Educational Loan, the borrower can claim tax benefits under Section 80 E of the Income Tax Act. The benefit, however, is restricted to only the interest component of the loan, and not the principal component.

• Loan Tenure

A Personal Loan needs to be repaid within a span of 1 to 5 years, while the repayment tenure of an Educational Loan can vary from 5 to 10 years depending on the loan amount, therefore making it easier for the borrower to repay the loan in smaller EMIs.

The Verdict

It would be unfair to compare the two products and pass a verdict in favour of any single credit form. Different people have different needs, and the choice may vary accordingly. For instance: If you are looking forward to a more cost-effective loan alternative, with increased flexibility with respect to repayment terms and tenure, you should opt for an Educational Loan. However, if you are on the lookout for a loan for studying in a course, College or University that is not approved by UGC or AICTE, or wish to avail a loan amount exceeding Rs. 20 Lakh, Personal Loan would be the choice.

Irrespective of the loan you wish to avail, make sure to shop around in search of better interest rates and more favourable terms, before filing your loan application. Moreover, don't forget to read the fine print before signing the loan agreement. Remember, a loan is a Long Term Financial Commitment, and staying alert with respect to the related aspects will help you enjoy a hassle-free and cost-effective credit.