Public or Private Lenders for Abroad Education Loan?

Every student considering studying abroad must've also contemplated whether should they take an education loan from a Government bank or a private lender. 

Students ask for opinions from their near and dear ones, look for information, seek their elders’ advice on it, conduct thorough research on the existing education loan schemes, and so on. 

Despite after information-gathering phase, many of us tend to get confused going through the options available in the market. What can be done in such a situation? What factors should you consider while choosing a lender?

In this article, we've compared the collateral education loan policies of public banks to that of unsecured education loan policies of private lenders (private banks, NBFCs, USD lenders) using 7 important parameters. 

This article is based on the 11th episode of the Loanflix series. You may listen to our speaker, Damini, Co-Founder of WeMakeScholars, explain these parameters in the video below.

Let’s begin the comparison of public lenders and private lenders by addressing some of the most crucial factors that determine the feasibility of an education loan scheme.

Note: We're comparing a collateral education loan from public banks to a non-collateral education loan from private lenders for abroad studies.  

When we talk about education loans, the very first factor we look for is interest rates. Those who have done their research on education loans might know by now that the interest rates offered by public banks are always lower than those offered by private lenders. The current interest rates offered by these lenders are-

From the above table, you can observe that the interest rates offered by private lenders are at least 2% more than those offered by public banks.

At first glance, this 2% difference may not seem like much, so let’s see how this difference affects the total repayable loan amount in the long run.

Assume you took out an unsecured education loan of INR 30 lakh from an NBFC at an interest rate of 11% for a 2-year master's course. Considering the loan tenure to be 10 years after the course ends and you'll pay the full interest during the moratorium period, you will end up paying a total of INR 59,51,110 (Just the total interest payable is 29,51,110) which is almost double. 

Had the loan taken from a public bank at 9%, the total payment would be 53,01,666 (the total interest payable is 23,01,666), about INR 6.5 lakhs less. You can check it yourself using this education loan EMI calculator.

How do you ensure you get the lowest interest rate possible on an unsecured education through private lenders? WeMakeScholars, an organization funded and supported by the IT ministry of India, has associated with 14+ public and private lenders, students applying for their education loans through us get an instant 0.5% reduction in interest rate from private lenders. 

Furthermore, we can negotiate not just interest rates, but processing fees and loan insurance percentages (parameters 2 and 4) which are negotiable with private lenders. Students lacking negotiation skills may miss out on a better deal. 

Read More on Education Loan Interest Rates – Comparison between public and private sector banks in India

The processing fees charged by private lenders are always higher than those charged by public banks. The processing fee charged by public banks for an abroad education loan can range anywhere between Nil - Rs.10,000. Yes, you read it right! Certain public banks do not charge any processing fee (depending on the university).

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 (Only for immovable collaterals). Despite including these extra charges, the total amount will still be less than the processing fees charged by private lenders.

Let us again try to understand the actual difference with the help of an example:

For a loan amount of Rs.40 lakhs, a public bank would charge you INR 10,000 plus 1,800 GST as processing fees. Adding on the additional legal and valuation expenses of about INR 8,000, the total comes to INR 19,800. On the other hand, for the same loan amount, a private lender would at least charge you a processing fee of Rs.40,000, with an additional Rs.7200 as GST, thus bringing the total processing amount to Rs.47,200. 

Now, the difference is pretty evident! Let’s move on to discuss the next parameter.

As mentioned in our previous articles and videos on collateral and non-collateral abroad education loans, a moratorium period is a duration before repayment commences, during which the borrower is ideally not obliged to make any loan payment to banks. 

Generally, the loan EMIs start the very next month after the loan disbursement for other types of loans (Personal, home, car, etc). However, for education loans, public banks offer a payment-free moratorium period which consists of the course duration plus 6 months. This can be extended to 6 more months if requested by the student due to any circumstances.

On the other hand, when you borrow an abroad education loan from any private lender, their loan repayments start the very next month after the loan has been disbursed. Private lenders do offer a moratorium period, but unlike public banks, you are required to pay either partial or full simple interest, if not the full EMIs.

For example, 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 a private lender, depending on the student’s profile, he/she would have to start paying Rs.5,000- Rs.15,000 towards their loan every month during their moratorium period.

Education Loan Insurance ensures that if a student dies or is gravely injured and is unable to repay the debt, the responsibility of repayment does not fall on the family. As per the RBI guidelines, loan applicants don't need to opt for loan insurance and this practice is followed by the nationalized banks. Private lenders, on the other hand, insist their loan applicants take insurance without fail. 

Should you opt for education loan insurance while applying for an education 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. Private lenders charge nearly 1%-2% of your loan amount as premium charges.

Although we encourage students to opt for loan insurance as it works as a safety net for both the borrower and the lender, keep in mind though, this may make an education loan for abroad study slightly more expensive.

Many students turn to private lenders for an unsecured education loan citing the longer processing time taken by public banks. However, it is to be noted that, since private lenders majorly lend non-collateral education loans for abroad studies, the paperwork involved is comparatively less, and hence their processing time is less. Private lenders approximately take around 7-8 working days to approve an unsecured education loan once all the required documents are submitted.

Ideally, public banks should not take more than 15-20 working days to process an education loan. However, because they mostly lend collateral education loans for abroad studies, which require legal verification and property valuation, they take at least 30-45 days to approve an abroad education loan.

The easiest alternative to this problem is to approach prominent public banks through WeMakeScholars. As we are funded and supported by the Ministry of I.T. under the Digital India campaign, our process is transparent and there are no 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 talk 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 for 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 well before turning to private lenders for the same. Get in touch with the WeMakeScholars team to get a detailed analysis of your profile which can, in turn, help you to decide on the appropriate lender.

If you have gone through our Loanflix 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.

Some common myths loom around 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, which is not true. Public banks do accept co-applicants with such profiles. But Private banks and NBFCs do not do so. 

Wondering what international lenders are? Well, international lenders do not necessitate co-applicant altogether. One main reason for students choosing international lenders for education loans is that these lenders do not need co-applicant.

Another thing to keep in mind is that public banks may accept your co-applicant's CIBIL score of less than 650 if it is for legitimate reasons, however private banks and NBFCs would not.

Approaching public banks through the WeMakeScholars team 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 include major public banks, to accept such co-applicants. 

Coming to the last and the most important parameter for those of you applying for an education loan for abroad studies is 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. The Loan sanction letter provided by 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 by the Australian and New Zealand embassies over those from NBFCs. The reason for this is, in the past, NBFCs have had a history of defaulting on education loan disbursements 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!

Now that you have taken note of the important parameters that can be used as comparison points between public banks vs private banks, I would like to address another common myth, because of which many loan applicants approach NBFCs for unsecured education loans.

While opting for education loans from public banks i.e. secured loans, 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 Private banks/NBFCs. Is this the right choice?

The Co-founder of WeMakeScholars and our expert, Damini Mahajan clarifies this point for you. Do watch the 15th 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. Many sources will give you a variety of options, but there can only be one decision. While deciding, consider all your options well, use the 7 parameters mentioned above to analyze between public banks and private lenders and then decide what's 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.