Education loan vs. personal loan: Which is better for funding your studies?

Beginning an academic pursuit is often a very important milestone which can involve a significant financial commitment. When assessing options to obtain the funds necessary to achieve your academic goals, personal loans and education loans are likely to be the two most prevalent.

Even though both provide you with some form of financial assistance, they engage you with different long-term effects, benefits, and structures. This article is intended to help you distinguish between the two.

Personal loan vs education loan: Key differences

1. Purpose & flexibility

• Education loans: Their structured nature, which often requires verification of admission as well as particular course details, helps ensure that student education loans are used for legitimate educational expenses.
• Personal loans: It allows money to be used for various purposes, including education. While their purpose is flexible, they do not come with the special benefits associated with education loans.

2. Interest rates & repayment terms

• Education loans: While education loans generally have better interest rates than personal loans, they also generally have moratorium periods, which helps ease the financial burden on students while they are studying, as they can start paying the loans after completing their studies.
• Personal loans: Personal loans are oftentimes paid back by students with no consistent source of income at a higher interest rate and usually have to be paid back quicker.

3. Tax Benefits

• Education loans afford some financial assistance at the time of repayment period as the interest you pay is allowed as a deduction under Section 80E of the Income Tax Act.
• Personal loans of course, do not have these benefits unless the personal loan is used for specified items like refurbishing a house.

4. Collateral & co-applicants requirements

• Education loan: Depending on the amount of borrowing requested, lenders ask for collateral plus a co-applicant, usually a parent or guardian, for added comfort in the repayment risk associated with larger amounts.
• Personal loan: Because personal loans are unsecured, it is unlikely that collateral or co-applicant references will be mandated. Approval for a personal loan is determined almost solely on the applicant's steady income and credit score.

5. Processing time & documentation

• Education loans: The application process for education loans includes an incredible amount of documentation, such as fee schedules and confirmation letters on student admission, which means applicants' loans will take longer to process.
• Personal loans: Personal loans are useful when a need for quick borrowing arises, because of the reduced amount of forms required and in general, faster processing than education loans.

Which one should you opt for?

Ankit Mehra, CEO and Co-Founder of GyanDhan, says “Personal loans feel convenient due to their speed and minimal paperwork, education loans are purpose-built and more student-centric. Education loans come with a longer repayment period of up to 15 years, making the EMIs affordable. They also come with a moratorium period, allowing you to defer repayments during course completion and at the start of employment. Therefore, providing a breathing room that every student needs when transitioning into the workforce,”

“If the amount is small and you have an immediate requirement, a personal loan is more practical. It's quicker to disburse and needs less documentation. But you'll be stuck with higher interest rates and a shorter repayment time, which can be financially draining as you're just starting,” he added.

In conclusion, the decision to take an education loan or a personal loan depends on the person's situation and financial goals. To make an informed decision that allows you to further your education, consider your financial condition, your future earning potential, and whether you can afford to pay back the loan.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.