Whom to Consult For an Education Loan: Bank or NBFC?

We know that education is the best gift you can give your children. A good education gives you the means to create wealth. But, quality education is expensive and can cost an arm and a leg. Even a simple MBA from a reputed College/University costs a tidy sum. But, can you deny quality education to your children, just because you don’t have enough money? Why worry when education loans are easily available?

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Whom to Consult For an Education Loan: Bank or NBFC?

A question still remains, whom do you approach to avail an education loan? Banks from both the public and private sector and Non-Banking Financial Companies (NBFCs), provide education loans. People first approach public sector banks, then private banks and finally NBFCs.

Confused? Don’t be. In this article, we will distinguish between banks and NBFCs, when it comes to availing education loan. We will see how these differ and which one should you approach. Read on:

1. Interest deferential:

Planning is very essential in every walk of life. Similarly, you should also plan before availing an education loan. Simply put, do not rush to avail an education loan. In the rush to grab that education loan, you could end up approaching institutions, that sanction loans real fast. What’s the flip side? They charge you higher rates of interest.

Even though NBFCs process loans real fast, they charge a high rate of interest.

2. Process involved:

Not just the interest rate differential, but also the process is an important parameter to decide a good financial institution to get an education loan.

Public sector banks have a lot of documentation, before sanctioning education loans. This makes processing loans a tedious process. You will also have to pledge collateral. NBFCs, on the other hand, process education loans real quick and do not ask for security/collateral against the loan.

3. Credentials:

PSBs sanction education loans based on parent’s credentials. NBFCs sanction student loans based on student’s credentials.

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Banks or NBFCs, which is the right one?

• According to CARE, Public Sector Banks are the biggest lenders in the education loan sector accounting for 95% of loans. They dominate lending in this space both in terms of value and volume.
• Public Sector Banks sanction bulk of education loans of ticket size
• Rs 4 Lakhs or below, which are unsecured. These loans also see a lot of defaults.
• While PSBs share in the education loan space is declining with mounting NPAs, NBFCs are grabbing market share. The NPAs in education loans have seen an increasing trend. Care Ratings reported in June this year that it was 5.7% in 2014-15, 7.3% 2015-16 and 7.67% in 2016-17.
• NBFCs sanction loans to students who have secured high marks. NBFC look at students’ marks/scorecards across various levels, especially graduation, before sanctioning the loans.

While the processing experience is very smooth in the case of an NBFC, interest outflow is huge. You will have to repay almost double that you borrow (loan amount). Most NBFCs accept documents online. Also, as we know, they do not need many documents which make the process hassle-free. But, what should you go for, convenience at the cost of differential interest or tedious processing with a low rate of interest?

• Even a small difference of 2 to 3% in the interest rates makes a huge difference. It sounds negligible but in the long-run, it costs you dearly. A difference of even 3% each year makes an education loan costlier by 30% over a decade.
• Public Sector Banks go slow in education loan processing because of a rising number of education loans going bad.

The final verdict:

• If you don’t have collateral, you can opt for an NBFC by paying slightly higher rates.
• If you have collateral like property, you can pledge it as security. You get an education loan at lower rates.
• Do not approach institutions in a rush. You will be forced to avail an expensive loan. An ideal time to start your loan process is at least six months before you need it.

Be Wise, Get Rich.