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Whom to approach for an education loan: Bank or NBFC?

Conservative approach surely favours banks when it comes to education loan. However, there will be some situations wherein the NBFC can be a better option to raise an education loan.

September 11, 2015 / 06:23 PM IST
Adhil Shetty

Sapna wanted to pursue an art course in one of the prestigious colleges in London. But she was worried about the high course fees. Sapna’s parents, who were open to taking an education loan, approached their bank. They had a long standing relationship with the bank, but much to their surprise, the bank rejected their application. The course in question was not in their list of approved courses, and for the same reason, her loan application was rejected.

Their neighbor advised them to approach a Non-Banking Financial Corporation (NBFC). Sapna’s father, who was conservative, was reluctant to approach a non-banking finance company, as all their financial transactions had been with public sector banks only.

This reluctance to approach a NBFC when it comes to loans is not all too uncommon. But, are NBFCs really a better option than banks? Or do banks score over their non-banking counterparts?

Let’s take a closer look.

Banks versus NBFCs

Flexibility: Banks and NBFCs have their own yardsticks while offering educational loans. While banks are reluctant to offer loans for non-technical and offbeat courses like photography, art, film making etc, NBFCs are more flexible in this regard, offering financial assistance to pursuing studies in more courses and countries. They also offer loans for up to 10 years tenure.

So, if you are seeking for any offbeat course or country for your higher education, you are better off taking a study loan from an NBFC.

Processing Time: Loan processing time taken by NBFCs are generally lesser as compared to public sector banks. However private banks provide quick approval of loans. Public sector banks, on the other hand, provide loans based on existing customer relationship. So if you have a good relationship with the branch, you are likely to get your loan approved quickly.

If you are applying for a loan to pursue education in a government college, premier institute or for an UGC-approved professional course, you can expect quick loan approval at both banks and NBFCs.

Collateral: Both banks and NBFCs take collateral for education loans, depending upon the course and institute. For government colleges, premier institutes and professional courses, collateral will not be required. In all other cases, collateral will be asked.

So, the conditions here are almost similar for both.

Accessibility: Banks—especially public sector banks—with their wide network of branches, are more accessible to the common man. Most public sector banks have branches in all small towns and villages. Though private banks have recently augmented their presence across the country, most of them offer education loans in Tier-1 and -2 cities only. NBFCs have comparatively lesser penetration in small towns and cities.

If you live in a smaller town, a public sector bank is the ideal lending partner for you.

Services: When it comes to services, NBFCs score over banks. They have special cells for providing visa assistance, counseling, doorstep services etc, as compared to banks. Most of the banks do not offer these.

For those seeking loan for studying abroad, NBFCs can offer customized services.

Charges: PSU banks have competitive interest rates as compared to private banks and NBFCs. But other charges like processing fee, pre-closure charges etc, will be higher for NBFCs. Most banks follow RBI rules and do not charge for pre-closure of loans. But NBFCs decide upon waiving pre-closure charges based on certain conditions like the duration, reason for closure etc.

It is recommended to check all these conditions beforehand.

The bottom line: Education loans from banks and NBFCs have their own set of advantages and disadvantages. Banks may not approve loans for offbeat courses. NBFCs are more flexible and also offer add-on services for students going abroad, and offer education loans even before securing admission. But interest rates, processing fees, loan prepayment charges and late payment charges can be higher at NBFCs. Banks offer discounts for women loan borrowers and students with merits, unlike NBFCs, which have a uniform interest rate for all.

Here is a random pick from education loan schemes offered by various banks.

SBI Student Loan Scheme:
Interest rate: 11.6% to 13.6%
Max Limit: 10 Lakhs for India and 30 Lakhs for overseas studies
Other conditions: Margin of 5% for courses in India and 15% for courses abroad

Axis Bank Education Loan:
Interest rate: 16.35% to 17.85%
Max Limit: Rs 10 Lakhs for studies in India and Rs 20 Lakhs for studies abroad
Other conditions: No margin for loans up to Rs 4 lakhs.

Avanse Education Loan (associate company of Dewan Housing Finance Ltd):
Interest rate: Determined individually based on profile and course
Max Limit: 100% finance and no upper limit
Other conditions: NA

Credila Education Loan (a subsidiary of HDFC Ltd):
Interest rate: Determined individually based on profile and course
Max Limit: Loan up to 100% of educational expenses
Other conditions: No margin money required, tenure up to 10 years

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