Education loan for abroad: Public banks vs. Private banks/NBFCs
When you plan on studying abroad, the first activity on your checklist is to search for an education loan. Deciding on a lender for an education loan for abroad studies is something that cannot happen overnight. You ask for opinions from your near and dear ones, look for information online, seek your elders’ advice on it, conduct thorough research on the existing loan schemes, both offline and online. When it comes to deciding on a lender, whether it be a public bank or a private bank/NBFC, many of us tend to get confused after going through the options available in the current market. What can be done in such a situation? How do you decide on a lender? Is a public bank better as compared to a private bank/NBFC? Or is it the other way around? In today’s article, we compare the collateral education loan policies of public banks to the unsecured education loan policies of private banks/NBFCs, using 7 important parameters.
This article is taken from the 11th episode of the web-series Loanflix – ‘Education loan for abroad: Public banks Vs. Private banks/NBFCs‘. Hence, you can directly view the episode by hearing our speaker, Damini, Co-founder of WeMakeScholars, tell you about these parameters. Click on the below video to start watching.
Let’s begin the comparison of public banks and private banks/NBFC by addressing the first and everyone’s favourite parameter, Interest rate.
Parameter 1: Education loan Interest Rate
When we talk of education loans, be it a collateral education loan from a public bank, or a non-collateral education loan from a private bank/NBFC, the very first factor we look for are the interest rates. Those who have done their research on education loans might know by now that the interest rates of a collateral education loan for abroad studies, offered by public banks have always been lesser than those of a non-collateral education loan offered by private banks/NBFCs. Let’s take a look at the current interest rates offered by both these lending options.
- Interest rates offered by Private banks/NBFCs: the interest rate varies from 11.99% – 14.5%.
- Interest rates offered by Public banks: the interest rates on education loans varies between 9.4% – 10.5%.
From the above statistics, you may observe that on an average, the interest rates of unsecured education loan from private banks/NBFCs are higher by more than 2% as compared to the interest rates offered by public banks for collateral education loan for abroad studies.
Let’s see how this difference affects the total repayable loan amount.
- Assuming that you have borrowed a loan amount of Rs. 30 Lakhs as unsecured education loan from an NBFC, a 2% extra rate of interest on Rs. 30 Lakhs loan brings the interest amount to be paid per year, to Rs.60,000.
- Let’s consider the loan tenure to be 5 years after the course ends. This means you will end up paying at least Rs.3 Lakhs extra to an NBFC, as compared to public banks. Let’s move on to the second important parameter, the processing fees.
Parameter 2: Processing fees of an education loan for abroad studies
- The processing fees charged by private banks/NBFCs are always higher than those charged by public banks.
- The processing fee charged by public banks for a collateral education loan for abroad can range anywhere between Nil – Rs.10,000. Yes, you read it right! There are public banks which do not charge any processing fee.
- For collateral education loans from public banks, you will have to spend a few extra bucks of Rs. 6,000 to Rs. 10,000 as legal verification and property valuation charges. But including these extra charges, the total amount will still be less as compared to the processing fees of NBFCs.
- NBFCs charge you about 1%-1.5% of your total unsecured education loan amount, with an additional 18% GST charges. This comes to a significantly huge amount, as compared to a public bank’s processing charges.
Let us, again, try to understand the actual difference with the help of an example:
E.g. For a loan amount of Rs.40 lakhs, a public bank would charge you Rs.10,000 as processing fees. Adding on the additional legal and valuation expenses of Rs 6,000, the total comes to 16,000. On the other hand, for the same loan amount, an NBFC would charge you a processing fee of more than Rs.40,000, with an additional Rs.7200 as GST, thus bringing the total processing amount to Rs.47,200. You see the difference now! Let’s move on to discuss the next parameter.
Parameter 3: Education Loan Repayment and Moratorium period
- As mentioned in our previous articles and videos on collateral and non-collateral education loan for abroad, a moratorium period is a time during the loan term, when the borrower is not required to make any loan payment to banks. It is a waiting period allotted to students by banks and lending institutions between the end of their respective course and the start of repayment of the loan amount.
- Normally, the education loan EMIs start from the very next month after the loan disbursement. However, public banks offer a payment-free moratorium period which ranges for the duration of the course and 6 months after that. This can be extended 6 more months if requested by the student due to any circumstances.
- On the other hand, when you borrow an abroad education loan from an NBFC, their loan repayments start from the very next month after the loan has been disbursed. They do offer a moratorium period, but this period is not payment-free.
- The interest amount for this period is calculated on a simple interest basis. A student may repay the interest amount partially, or in full.
E.g. If a loan of Rs.40 Lakhs is borrowed from a public bank, the student doesn’t have to start repaying the loan amount till the end of his/her moratorium period. If the student borrows the same amount from an NBFC, depending on the student’s profile, he/she would have to start paying Rs.5,000- Rs.15,000 towards their loan every month.
Parameter 4: Loan Insurance
- Loan insurance ensures that if the borrower meets with an untimely death, or gets seriously injured, the burden of the loan repayment does not fall on the family. According to the RBI guidelines, it is not compulsory for loan applicants to opt for loan insurance and this practice is followed by the nationalized banks.
- NBFCs, on the other hand, insist that their loan applicants take insurance without fail. Should you opt for an education loan insurance while applying for a student loan from a public bank, it is to be noted that public banks charge about 0.5% – 1% of your loan amount as a one-time premium. NBFCs charge almost 1.5%-2% of your loan amount as premium charges.
- So, if you borrow a loan amount of Rs.40 Lakhs from an NBFC, and also opt for insurance, an extra fee of Rs.30,000-Rs.40,000 will be charged for the same.
- Although we recommend that you opt for loan insurance, as this is a safety net for both, the borrower and the lender, do keep in mind that this may make an education loan for abroad studies, slightly costlier with the one-time premium.
Parameter 5: Processing Time
- Many applicants turn to NBFCs and private banks for their abroad education loans citing the longer processing time taken by public banks, as a reason. However, it is to be noted that, since NBFCs majorly lend non-collateral education loan for abroad studies, the paperwork involved is equally less, and hence their processing time is less. NBFCs approximately take around 7-8 days to approve an education for abroad.
- Ideally, public banks should take no longer than 15 days to process a loan sanction. Since they mostly lend collateral education loan for abroad, of which legal verification and property valuation are important steps, they take at least 1-1.5 months to approve abroad education loans.
- The easiest alternative to this problem is to approach public banks through WeMakeScholars. As we are a just-not-for-profit initiative, funded by the Ministry of I.T. under the Digital India campaign, our process is transparent and there are no extra service charges. Due to our association with public banks, we take you closer to your loan approval as opposed to you approaching these banks directly. Our financial officers appeal to these banks on your behalf to make your loan approval process faster, thus reducing the processing time to 15-18 days.
- Decisions regarding your abroad education loans need to be well researched with respect to this parameter. However, if you plan on approaching a public bank for your education loan needs, do not deflect from your plan just because of this one factor. Weigh your options before turning to NBFCs for the same.
Parameter 6: Co-applicant Profile
- If you have gone through our previous episodes and articles on collateral education loans, you may know by now that a co-applicant is extremely crucial to the collateral education loan application process.
- For secured education loans, public banks are the best bet. However, many applicants are unaware of the eligibility criteria for a co-applicant in a public bank and a private bank/NBFC.
- If you are still under the impression that public banks do not accept people who are retired, are farmers, have a weak income profile, and those without relevant income proofs as co-applicants, I would like to clarify that this is not true. Public banks do accept co-applicants with such profiles. But NBFCs do not.
- Another point to be noted is that if your co-applicant’s CIBIL score is less than 650 due to certain genuine reasons, public banks still do accept them, however, NBFCs refuse to do so.
- Approaching public banks through WeMakeScholars eases the process for those who have co-applicants with a weak CIBIL score. Due to our association with them, our financial officers can convince our partner banks, which includes major public banks, to accept such co-applicants. Request a callback from our financial officer.
Parameter 7: Embassy/University acceptability
- Coming to the last and the most important parameter for those of you applying for an education loan for abroad studies- Whether the lending bank/NBFC is deemed as an eligible lender by your university or the embassy of the country that you are planning to study in.
- Loan sanction letter from your lender plays an important role in determining whether you are eligible to avail certain additional advantages in your visa interview process.
- The loan sanction letters from government banks are always preferred and widely accepted than those from NBFCS like Credila. The reason for this being, in the past, NBFCs have had a history of defaulting on loan disbursement due to a shortage of funds. Government banks do not have this problem.
We hope that these 7 parameters will be extremely helpful to you in deciding on an education loan lender. Don’t stop reading, there’s one more section to go!
Know the Hack!
- Now that you have taken note of the important parameters that can be used as comparison points, I would like to address another common myth, because of which many loan applicants approach NBFCs for unsecured education loans.
- While opting for secured loans with government banks, applicants often fall into this dilemma of whether their pledged collateral is safe with public banks. In some cases, the applicants may not want to pledge the house occupied by their family members as collateral.
- Are these fears true? Normally, in such situations, applicants often change their decision to apply for a collateral education loan with public banks and instead, opt for unsecured education loans from NBFCs. Is this the right choice?
- The Co-founder of WeMakeScholars and our expert, Damini Mahajan clarifies this point for you. Do watch the 11th episode of our Web-series, Loanflix to know the solution to this dilemma. Loanflix is the most comprehensive web-series on abroad education loans. The motive is to empower students and their guardians so that they can take an informed decision about the education loan. You will find information here that is not available anywhere else on the internet.
The process of applying for an abroad education loan starts with you deciding on a lender. There are many sources which will give you a variety of options, but there can only be one decision. While deciding, consider all your options really well, use the 7 parameters mentioned above to analyze which option would be the best for you. Because in the end, it is you who stands to gain or lose depending on the decision you make.
Speak with our financial officer to get help and assistance.
Also, check your eligibility for the best education loans matching your profile.
Note: WeMakeScholars is an organization funded and supported by the Government of India that focuses on International Education finance. We are associated with 10+ public/Pvt banks/ NBFCs in India and help you get the best abroad education loan matching your profile. As this initiative is under the Digital India campaign, it’s at free of cost. The organization has vast experience dealing with students going to various abroad education destinations like the US, Canada, UK, Australia, Germany, Sweden, Italy, China, France among others