Improve score, arrange collateral before education loan application
While banks offer lower interest rates, NBFCS and fintechs approve them faster
While the Covid-19 pandemic disrupted the plans of many students headed to foreign universities last year, the situation seems to have improved now. The United States has issued the highest ever number of visas, over 55,000, to Indian students this year.
Saurabh Jhalaria, head of education and SME (small and medium enterprise) lending, Incred Finance says, “July, August and September are the busiest months for students going abroad. They also avail of loans primarily during these months.”
Job-oriented courses get financed
Students can get education loans for overseas studies from banks, non-banking finance companies (NBFCS) and fintech lenders. While there is no dearth of options, availing a loan is not easy. Sahil Arora, senior director, Paisabazaar says, “The economic disruption caused by the pandemic has led to banks and NBFCS becoming more conservative in their loan evaluation process.”
There are challenges on other fronts, too. Adhil Shetty, chief executive officer, Bankbazaar says, “Lenders do not finance all courses. Most banks typically offer educational loans for longterm, job-oriented, professional and technical courses at the undergraduate and postgraduate levels offered by reputed universities.” Diploma courses like aeronautical, pilot training, and shipping also fall in the approved list, provided they are recognised by the regulatory bodies in India or abroad for employment. Shetty adds, “If you're considering an off-beat course or a course from a university or college not on the lender’s approved list, you may not get a loan to fund it.”
Most lenders insist on collateral for loans above ~7.5 lakh. If the student does not have property or investments that can cover the cost of the loan, the loan may not get sanctioned. Shetty says the lender may even keep a margin of 5-20 per cent and not sanction the entire amount. That would mean expenses incurred on living, travel, buying books and laptops, etc may have to be met out of one’s own pocket.
Banks offer lower rates
Banks, especially the publicsector ones, have always been the top lenders in education loans. V Swaminathan, chief executive officer (CEO), Andromeda and Apnapaisa, says, “Banks have lower cost of funds, so they typically offer loans at lower interest rates.”
Interest repaid on education loans qualifies for tax deduction under Section 80E with no ceiling. This deduction can be availed for eight years once repayment begins.
On the flip side, banks typically offer lower loan amounts (though some go up to ~1.5 crore). Banks, especially the public-sector ones, are also slower in processing loan applications.
Nonetheless, your bank should be your first option. Swaminathan says, “First, try for a loan from a bank with which you have an existing relationship.”
NBFCS: Faster approval
Most non-deposit taking NBFCS borrow from banks for onward lending, hence their interest rates are higher.
Swaminathan says, “NBFCS typically process the loan application faster and take fewer days to give approval.” They are also more flexible, offering a wider range of services and addons to students. Jhalaria says, “NBFCS offer more flexible and customised payment schedules than banks.”
Education loans availed from specified NBFCS also qualify for Section 80E tax deduction.
However, education loans from NBFCS tend to be more expensive, with interest rates ranging from 11-13 per cent, sometimes even 15 per cent, depending on the candidate's profile, eligibility and other criteria.
Understand all the terms and conditions in the contract, collateral requirement, etc before signing the application and acceptance letter.
Traditionally, banks sanction loans only after the student has confirmation on admission. However, certain NBFCS offer pre-approved education loans, even before the student has applied to universities.
Fintechs: Flexible terms
Those unable to get an education loan for overseas studies from banks and NBFCS may consider fintech lenders. They are more technology driven. Their entire application processing is online. The terms are more flexible as well.
But they charge a higher rate of interest because of their higher cost of funding. Their rates can range from 12-16 per cent, or more.
Those who have a tight deadline may go for this option, according to Swaminathan. Those who have a poor credit history may also consider them.
Global lenders: No collateral required
Global lenders such as Prodigy and Mpower Finance also lend to students headed to foreign universities. Their interest rates usually range from 9-14 per cent. Some educational institutions have tie-ups with them. Since these lenders offer massive loans with zero collateral and don’t require a co-borrower, they set the bar high in terms of whom they lend to. Everything hinges on the student’s ability to get a well-paying job in that country.
Things to keep in mind
Check whether the university or institute has a tie-up with a bank or NBFC for education loans. Arora says, “Such tie-ups can result in faster loan processing and even lower interest rates.”
Banks and many NBFCS offer moratorium on education loan repayment, during which the borrower needn't pay EMIS. This period is up to a year after the completion of the course or six months after getting a job, whichever is earlier. Remember you will continue to incur interest cost during the moratorium. Hence, try to at least service the interest component during this period. Some lenders provide concessions on interest rates to those who do so.
Lenders consider the credit scores of borrowers. Arora says, “Start working toward building a credit score of 750 or above.” A higher score means better terms and lower rates. As lenders may ask for a third-party guarantee and collateral where the loan amount is higher, work on arranging these.