Avoid fintech education loans, as banks charge less and offer better terms

With the surge in the number of fintech start-ups that are into lending, access to credit for educational purposes has become easy for parents. They have started borrowing even for school fees, given the rise in education costs for their children. For instance, Avanse Financial Services, a non-banking finance company (NBFC) has launched Avanse School Fee Financing scheme in partnership with fintech firm EarlySalary. They offer education loans to pay school fees of up to Rs 3 lakh, which can be repaid in 3-6 months. Akshay Mehrotra, co-founder and CEO of EarlySalary says, “The cost of education at schools has increased manifold and this loan product will ease the burden on parents.”

Then we have DiFin, which is another fintech start-up that offers a parent loan scheme. Borrowers (parents or guardians) can take loans for paying school fees, tuition fees for any courses, hostel expenses, etc.

Also, students are now borrowing from fintech start-ups such as SlicePay, Krazybee and DiFin to pay for their living-costs while pursuing studies, purchasing electronic equipment (laptop, DSLR camera, etc.) used in the course program and arranging for fees of short-term courses.

Documentation required

If parents apply, they need to create an account in the fintech lender’s website. Then, it’s mandatory for applicants to submit their permanent account number (PAN), Aadhaar, the past one year’s bank account statement and salary slips. In case parents are self-employed, they need to submit the last three years’ income tax returns.

Similarly, documents are required in case an applicant is a salaried individual applying for an education loan to pursue a vocational or short-term course.

These loans are for short tenures ranging from three months to three years, depending on the borrower’s credit profile and the tenure of the course. The interest rates on this scheme may range from 12 to 16 per cent annually.

In case a student is applying for a pay card from a fintech start-up for her living-costs or to purchase electronic equipments used in the course program, she has to submit a photocopy of her college identity card, address proof and identity proof for the KYC process. Since a student may not have a credit history and credit score to assess the risk profile, fintech start-ups may seek borrower’s social media profile links (LinkedIn, Facebook, Twitter, etc.) and mobile number to evaluate her profile, social behaviour and other data points. Abhishek Gandhi, Co-Founder at peer-to-peer lending firm RupeeCircle says, “The privacy of borrower is not assaulted since login and password details of social media accounts are not required by fintech lending firms to evaluate the profile.”

If a borrower has shared the social media profile links then he/she may get better interest rates since the profile is evaluated other data points verified. Then, the fintech lending firm decides whether the student is eligible for such a pay card and also assigns a suitable credit limit on it.

There are charges applicable on any default in repaying the equated monthly instalments (EMIs). For instance, on SlicePay Card, the company offers a maximum credit limit of up to Rs 60,000 to students. This limit varies based on risk assessment results. The interest rate charged is 12 to 15 per cent yearly on credit purchase made using this card, from Amazon, Flipkart, etc. In case a student defaults on EMIs, the company can charge up to Rs 2,000 as penalty.

What doesn’t work?

These fintech start-ups charge higher interest rates on loans compared to what banks levy. For instance, Bank of Baroda offers a Baroda Vidya education loan scheme for school education from nursery to class twelve. The maximum limit is Rs 4 lakhs and the interest charged is 10.6-13 per cent.

Sapna Tiwari, Co-Founder and COO, Rupeewiz Investment Advisors says, “There is no need to borrow separately from fintech start-ups for purchasing equipment, pay hostel fees, etc. and pay interest on the borrowed amount. There are many banks that include these additional costs in the education loan sanctioned.” So, consider applying to such banks for education loan instead of fintech start-ups. For instance, Allahabad Bank has a Gyan Dipika scheme and Central Bank of India has a Cent Vidyarthi plan for education loans. The amount sanctioned comes without sub-limits.

Hrushikesh Mehta, Country Manager, ClearScore, a loan aggregator and credit scoring company warns, “Exposing students at young age to credit products such as pay cards from fintechs without giving credit lessons could impact their job prospects after graduation since they might be defaulting on their EMIs on multiple loans taken with easy access to credit. This would impact their credit report.”

Not all education loans qualify for deduction under section 80E of the income tax act. It is only available for loans taken for pursuing higher education after passing the Senior Secondary Examination. Gaurav Aggarwal, Director and Head, Unsecured loans of online financial marketplace Paisabazaar.com says, “The tax deduction applies only to education loans availed from banks, financial institutions notified under the Income Tax Act and approved charitable institutions.” So, you cannot claim tax deduction on funds borrowed from fintech start-ups for education purpose.

Moneycontrol’s take

You would be better off avoiding education loans from fintech start-ups, as you will end up paying higher interest during the tenure of the loan. Borrowing from banks works out better. You would get a composite education loan scheme that includes hostel fees, tuition fees, loan to purchase computer/other equipments from banks. Also, these education loans from banks are eligible for tax benefit.

Education loans from fintechs are useful for those who cannot borrow money from banks due to poor credit report or lack of a credit history. However, it’s a bad idea to start your working career with multiple loans by using pay cards offered from fintech firms, to spend on shopping, entertainment, etc. while pursuing your studies.