Like for all other loans, you have to pay interest on education loan too. But unlike other loans, education loan provides the option of a moratorium period or a repayment holiday, which means, the borrower can suspend repayment of the loan till the education course for which the loan was taken is completed.
You start repaying the loan through EMI immediately after loan disbursement, in which case you could get the loan at an interest rate lower by about 1 per cent.
The repayment conditions vary from bank to bank. So, talk with as many banks as possible to get the repayment option that suits your requirements.
Interest rates
Interest rate on education loan is usually lower than a personal loan but slightly higher than a home loan.
Some banks offer a fixed rate of interest while others offer floating rate of interest on education loan. If the difference between fixed and floating rate is only about 1per cent, it is advisable to opt for fixed rate as education loans have shorter repayment tenures of 5-7 years. Many banks do not offer genuine fixed interest rate where the interest rate remains fixed for the full tenure of the loan. They, typically offer a fixed rate loan with a reset clause. This means the bank will have the right to revise interest rate after 2 or 3 years or whenever the bank feels it necessary to increase interest rate. So make sure that you take a genuine fixed rate loan. If it is a fixed rate with reset clause, a floating rate may be a better option.
Finally, the choice between a fixed and floating rate is dependent on the risk appetite of a loan taker. If you are totally risk averse and do not want to face the prospect of your EMI or repayment tenure shooting up in the event of an upward movement of interest rate, then you should definitely go for a genuine fixed rate education loan. However, if you strongly feel interest rate will go down during the loan tenure and is willing to take a risk on that count, you can perhaps opt for a floating rate loan.
Many banks, especially public sector ones, have special schemes for girl students. Some banks offer 1per cent lower interest rate for girl students. So check with your bank about al special schemes.
Processing fee
Many banks do not charge a processing fee for education loan. So if your bank asks for a processing fee, you might be able to persuade the bank to waive it.
Prepayment fee
Again, in almost all cases, banks allow foreclosure or pre-payment of the education loan without charging a penalty if the borrower makes the payment from his own sources. Banks charge a pre-payment penalty (usually up to 2 per cent of the loan amount) if the loan is transferred to another bank.
Lastly, it is always advisable to check with as many banks as possible before finalising your lender to get the best deal.
Photograph: MANPREET ROMANA/AFP/Getty Images | Image: Students reading the loan application form
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