Education or personal loan: Which is a better way of financing higher education?

The cost of education is on a constant upward trajectory, and it looks like school fees are not going to decrease anytime soon. Then how can children receive the best education without burning out all the savings? In that case, loans can help a student study without holding back on the choice of course or college.

While various students are now slowly opening up to the idea of taking loans to pursue higher education. Not many of them are aware of what type of loan to choose. Basically, there are two distinct choices when it comes to funding higher education — personal loan and education loan.

Let us begin by understanding the primary differences between the personal loan for education and education loan:

Personal loans are unsecured loans that can be availed by the students or parents to fund education. The amount, interest, and tenure of the loan will be entirely dependent on the applicant's income, the company he/she is working with, and the past credit score. The unsecured personal loan applicant can also be the student's parent if the student is not earning.

Now talking about education loans - Education loans are loans that are availed by students to fund their education and are backed up by a guarantee of their parents or collateral in case of a huge loan amount. The loan is extended for the sole purpose of admission to a university, and the amount of loan granted by a financial institution covers the basic expenses of that course (this can vary from bank to bank).

In case of an education loan, the loan applicant is the student; hence, the student holds the primary responsibility of repaying the loan from his/ her income once they start earning. The parents have to pitch in as a guarantor in case the student fails to meet the repayment obligations. However, remember that banks may still insist on having parents as a co-applicant, a third party, and collateral security for higher education loan amounts.

In case of personal education loan criteria as set by leading digital NBFCs such as Clix Capital is:

• The student should be over 25 and under 58

• A salaried employee who's employed in the current company for six months and has a total professional experience of at least 12 months

• Earning a minimum income of Rs 25,000 per month

The loan amount eligibility in case of personal loan is based on the loan applicant's repayment capacity irrespective of the education cost. Further, these loans are easy to avail of as there is no collateral required and fewer documentation requirements as compared to education loans. Moreover, if one wants to know their EMIs before applying for the loan, one can use a personal loan EMI calculator that is an online tool which helps to evaluate the EMIs within a few seconds by just selecting the desired:

• Loan amount

• Tenure

• Interest rate

To compile, both personal and education loans can be a feasible choice for students or parents depending on the current financial standing, availability of collateral (not in case of personal loan), loan amount, and the level of flexibility preferred. Hence, it is advisable to evaluate the two options thoroughly before choosing the one that best suits the requirements.