Bank vs NBFC: Keep these factors in mind while taking an education loan
According to Crif High Mark, an RBI-approved credit bureau, 90 percent of education loans taken are from public-sector banks by value and volume.
For many taking an educational loan for pursuing higher studies is always been a highly sought-after alternative. According to Crif High Mark, an RBI-approved credit bureau, 90 percent of education loans taken are from public-sector banks by value and volume. Further, 20 percent of loans are in the Rs 4-Rs 10 lakh bracket.
When it comes to borrowing funds for higher studies, you can choose between approaching a bank or a non-banking finance company (NBFC). Here are few factors that may differ across banks and NBFCs:
Will all courses be covered?
Banks are provided with an indicative approved list of the courses. However, they may also consider courses other than the above offered by reputed institutions on the basis of employability and on case-to-case basis.
Further, loans are categories as below:
a. Loans to students admitted to top rated institutions
b. Loans to students admitted to other domestic institutions
c. Loans to students seeking studies abroad. It is expected that depending upon risk perception, reputation of the institution and employability of the student, banks will be able to fine tune their terms and conditions of sanction suitably to these categories.
NBFCs like Avanse, Tata Capital, and HDFC Credila offer education loans. Such NBFCs may be more flexible in offering loans when it comes to the choice of courses. NBFCs like Avanse offer loans on unconventional and vocational courses like new age technology courses, data sciences, photography, sports engineering, music, animation, painting, theatre, dance, language etc. are increasingly gaining importance among students", says Amit Gainda, CEO, Avanse Financial Services..
Avanse, for instance, use tools such as 'The Employment Predictability Model' before lending. Gainda informs, "This model has been developed to derive the future income of the student and takes into consideration critical factors like Entrance Test Score, Academics (U/G results), Work Experience, the stream, course and University where the student has secured admission and combines it with data about the employment history of the university and program. Therefore, Avanse evaluates not only the student but also colleges and courses for their potential employability before lending."
Is there a cap or restrictions for expenses?
Both banks and NBFCs cover most of the common expenses such as fee payable to college, travel expenses, caution deposit, building fund deposit, purchase of books, equipments, purchase of computer amongst other expense heads.
However, in case of banks there could be restrictions and caps in place. For courses under management quota seats, fees as approved by the Government approved regulatory body are considered. Also, reasonable lodging and boarding charges is considered in case the student chooses or is required to opt for outside accommodation. Also, some of the expenses could be considered subject to the condition that the amount does not exceed 10 percent of the total tuition fees for the entire course. Further, several other expenses such as cost of purchase of books, computers, study tours etc may be capped at 20 percent of the total tuition fees payable for completion of the course.
All bank loans, including education loans, taken after April 1, 2016, are now linked to the bank's marginal cost of funds based lending rate (MCLR). Earlier, they were linked to the bank's base rate. NBFCs, however, do not have the concept of MCLR and, thus, may set their own rates based on competition and their cost of funds.
The interest rates in educational loans are floating rates and not on fixed basis. Typically, interest rates on educational loans are MCLR plus 1.5-2 percent or could be higher in few banks, varying as per loan amount and the course or institution. The one year MCLR currently is around 8.5 percent for most banks, this makes the educational loan interest rate available between 8.50 to 11 percent, including the mark-up, if any. As far as rates of NBFC's are concerned, it too varies across NBFCs. "The average lending rate of interest of the NBFCs ranges from 11 percent to 13 percent ROI depending upon the candidate profile, eligibility and other criteria which may vary from case to case," says Gainda.
Do you have to pay margin money?
In some cases, you may be asked to furnish margin money (for loans above Rs 4 lakh) which could be up to 5 percent of the loan amount for courses in India and up to 15 per cent for foreign universities. With few banks, there could be no such margin money requirement and you can get 100 percent funding. With most NBFCs, is no margin requirement, i.e., you can get 100 percent funding.
Income proof of parents
The loan is sanctioned on a joint borrower basis. The joint borrower should normally be parent or guardian of the student borrower. In case of a married person, joint borrower can be spouse or the parent or parents-in-law.
In case of banks, the loan is sanctioned on the basis of co-obligation of parents or the guardian as joint co-borrowers. However in case of NBFCs, Gainda says, "While we do the credit worthiness for parents/co-borrower, it is only one of the many parameters taken into consideration for determining the loan eligibility of the student." He adds, "Loans are sanctioned basis the student's employment prospects post completion of the course and this is determined from a detailed analysis of the student's academic and GRE scores (in case of foreign education)."
The repayment options are more or less similar in both banks and NBFCs. Typically, all education loan lenders extend multiple repayment options. One may consider an 'EMI holiday' till the course ends or a 'step-up EMI' which keeps on increasing as the years progress. Servicing of interest during study period and the moratorium period till commencement of repayment is optional for students. If only interest has been paid during the course, accrued interest will be added to the principal amount borrowed while fixing EMI for repayment.
Overall, getting an education loan from an NBFC would be beneficial if you are looking to fund an off-beat course especially because there may not be any cap or such restrictions and the entire amount of expenses may be financed. Further, for those looking for quick disbursal, NBFCs could be more suitable.
Things to look at while taking education loan
These are some factors to keep in mind while scouting for an education loan:
What makes the education loan unique is the moratorium period which is equal to the length of the course. During this period, different issuers may structure the loan differently. In some banks, there could be complete moratorium during the course (not even simple interest to be paid) or there could be moratorium only on principal repayment, while only simple interest needs to be paid. With most banks it can be extended up to 12 months so that one gets a job during this period. The extension of repayment period (after moratorium) is up to 15 years for all loans.
As per the Indian Banks Association guidelines, the maximum loan for studies in India can be up to Rs 10 lakh, while for studies abroad it can be up to Rs 20 lakh. The guidelines, however, allow banks to offer a higher amount on the basis of the course and the institute. The quantum of loan that a bank would offer to you would rest on two things - the course and the institute. Banks have their own listing of institutes and have graded them on the basis of reputation. Premier the institutes have a higher grade, the loan amount granted would be higher and the interest rate would be lower.
Depending on the loan amount, bank may ask for collateral. For loans up to Rs 4 lakh, there is no collateral required, what one needs is a co-borrower who can be the student's parent. For amount between Rs 4-7.5 lakh, most banks, in addition to making parents the co-borrowers, may ask for a third-party guarantee if the loan doesn't fall under Credit Guarantee Fund Scheme for Education Loans (CGFSEL). Under the CGFSEL, the maximum loan limit under this scheme is Rs 7.5 lakh without any collateral security and third party guarantee
For loan amount in excess of Rs 7.5 lakh, banks would ask for pledging securities of equal value which could be property papers, post office savings products, life insurance policy, share or mutual funds, bank deposits amongst others. Collaterals aren't a must in all cases. A bank may have a maximum limit of Rs 30 lakh but would ask for collateral if the loan offered is above Rs 20 lakh. Also, banks have different slabs for different institutes.
Based on the loan amount and also based on the credit history of the borrower, NBFCs ask for the collaterals and hence they are more flexible on this parameter.
The tax benefits
To avail section 80E tax benefit, the loan has to be from an approved entity. Get it conformed from the bank or the NBFC upfront before proceeding further if you want to avail tax benefits. The simple interest payment, in all likelihood will be made by the student's parent who may avail tax benefit on such interest payment under section 80E.
Once, the moratorium ends, the student can pay EMI to bank. For tax benefit, there is no ceiling on the interest amount and such deduction from income can be availed for eight years, however, principal repayment doesn't get any tax benefits. Also, there could be times when simple interest payments are ignored or not paid to bank. In not doing so, the 1 percent concession (most banks offer this) on the agreed rate of interest cannot be availed of.
There could be a loan processing fees of 1-1.5 percent of loan amount depending on Indian or foreign course. Further, there could be a pre-payment charge as well, which not all banks or NBFCs may charge.
What to do
Banks may make it mandatory to arrange for life insurance policy on the student availing the education loan. The loan is a liability and hence co-borrower should ensure an insurance cover equal to the loan amount, preferably though pure term insurance plan.
Get an estimate from the bank or the NBFC on the EMI that needs to be paid after the course ends. Ideally, EMI should not be more than 25 percent of one's net-take home salary.
Effort should be there to keep a healthy repayment record to ensure a high credit score so that any future requirement for debt doesn't get impacted. Make use of the financing option to realise your dream career and in the process learn the nuances of money. After all, it's going to be first loan as a student.