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Funding your Education: Personal Loan Vs Education Loan

IndianMoney.com Research Team | Posted On Friday, June 14,2019, 02:35 PM

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Funding your Education: Personal Loan Vs Education Loan

 

 

Education loan and personal loan are the best options available for students who want to fund their higher education. But, comparing both the loans can be a time-consuming process.

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Funding your Education: Personal Loan Vs Education Loan

Discussed below are the pros and cons of both personal loan and education loan:

Key Differences Between a Personal Loan and Education Loan:

Loan Amount: Loans are sanctioned based on the credit score and financial standing in case of a personal loan. An education loan is sanctioned based on the estimated expenditure required to complete the course. The funds availed can only be used for education-related expenditure and not any other purpose.

Moratorium Period: Personal loan repayment starts immediately after the loan is sanctioned. An education loan offers a moratorium period that reduces the immediate burden of the loan repayment after the completion of the course. So a student can start paying the loan EMIs a year after the completion of the course or 6 months after getting a job, whichever is earlier.

See Also: Tax Benefits on Education Loan

Interest Rate: The rate of interest on a personal loan is higher than education loan.

Loan Tenure: The maximum repayment tenure of a personal loan is 5 years, whereas the maximum tenure of an education loan is 8 years.

Collateral: Personal loans are collateral-free loans. However, an education loan requires a guarantor (parent/ spouse) if the sanctioned amount is above Rs 4 Lakhs.

Tax Benefits: The borrower can avail tax benefits on an education loan. No such benefits can be availed on a personal loan. You get a tax deduction under Section 80E on the education loan interest up to any limit.

See Also: How to Get a Student Loan?

Pros and cons of personal loan:

Pros of personal loan:

  • Use of Funds for Multiple Purposes: Personal loan does not have any restrictions on the use of the borrowed money. There are no preconditions and the funds can be used for any purpose. So, if you avail a personal loan for education, you can also take care of the additional expenses incurred on your education.
  • Easy to Apply: Education loan involves verification of documents like admission form, expense related documents and so on. The bank verifies documents and the loan amounts are sanctioned based on the estimated cost of the course. A personal loan does not require you to disclose, how the money will be used. A personal loan is easy to apply for and requires minimal documentation.

Cons of Personal Loan:

  • High interest rate: The personal loan interest rate is higher than the education loan and there are no tax benefits or a moratorium for personal loans.
  • Immediate repayment: The EMI repayments begin as soon as the personal loan amount is sanctioned. There is no moratorium period offered, unlike an education loan.

Pros and Cons of Education Loan:

Pros of Education Loan:

  • A Lower Interest Rate on Loans: The rate of interest on education loan is much lower than personal loans. There are also various government subsidized education loans in India. In case you qualify for the subsidized loan, the rate of interest is much lower than personal loans.
  • Repayment Flexibility: The education loan has longer repayment tenure than a personal loan. It also has a moratorium period ranging from 6 months to 12 months post completion of the course. An education loan allows you to minimize your loan burden and also covers related expenses incurred on the course.

See Also: Personal Loan For Students

Cons of Education Loan:

  • Loan Restricted to Education: The loan cannot be used for any other purpose like travelling, accommodation and food. The education loan can only be used to fund education-related expenses like hostel fees, lab fees, tuition fees, cost of project or thesis.
  • Might Ruin your Credit Score: Not repaying your education loan EMIs on time may ruin your credit score. If you take an education loan, you will be under pressure to find a job within the moratorium period. In case you do not find a job within the given time or you struggle with repayments, your credit score goes down.

The final choice is yours. If you opt for a personal loan, then you can cover other expenses like food, accommodation and travel. However, the repayment starts immediately. If you avail an education loan, then you get it at a lower interest rate and you will have the flexibility in repaying the loan.

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