Interest rate in an education loan, like in any other personal loans provided by public and private sector banks, is key to determine the total amount you have to repay when the equated monthly installment (EMI) begins.
Lending institutions provide different types of education loan and charge interest rates depending upon the students’ choice to study further, either at domestic colleges or abroad. Interest rates on education loans also vary upon lending institutions, loan amount, repayment tenure, borrower’s credit profile as well as aspirants’ select-course and the type of education institution offering the course, to name a few.
An interest rate fixed by the bank on an education loans plays a crucial role in one’s ability to pay the borrowed amount. Although banks do not ask you to pay the sum during the moratorium period or while you are studying, it is best to consider paying at least the interest amount during the period. Doing this will not only ease the burden of the EMI, but may as well help you get a certain concession on the principal loan amount later as per the bank’s policy.
Forbes Advisor India has put together a list of education loan schemes and the interest rate currently offered by public and private sector banks of India to help you better understand the types of plan that would suit your personal finance needs.
How Do Banks Calculate Interest Rates On Education Loans?
Most public and private sector banks in India offer “floating interest rate” while lending an education loan. In this type of rate of interest (ROI), the interest rate on your easy EMI is calculated as per the “base lending rate” plus the standard premium rate, or credit spread, markup, etc.
Banks refer to base rate, with floating components like repo-linked loan rate (RLLR) or marginal cost of fund-based lending rate (MCLR), among others, while determining their actual interest rate on education loans.
Notably, the base rate for every bank changes as per the RBI’s change in repo rate (the rate at which the public and private banks borrow money from the apex bank), which is reviewed on a bi-monthly basis. Therefore, the interest rate in your floating EMI is revised as per the change in the RBI’s repo rate.
This change is, however, reflected after the “reset period” when the interest rate on your EMI is subjected to revisions. The reset period in the RLLR type of floating component is three months while it usually takes six to 12 months for the reset to take place in the MCLR concept of fixing the interest rate on your EMI.
In a nutshell: Final Interest Rate = Base Rate (MCLR/RLLR/Repo Rate) + Standard Premium/Spread per annum.
It would be best to consider this aspect of calculating floating interest rate before you choose an education loan for your further studies. Nonetheless, banks usually provide the breakdown of interest rates on your EMI against the outstanding amount in your education loan sanction letter.
Education Loan: Things To Consider
Most banks offer concessions on the ROI (normally 0.50%) to female/SC/ST/minority/physically challenged students.
Central Government schemes like CGFSEL, ACSISOBCEBC, Padho Pardesh Scheme offer subsidies on interest charged on the loan amount.
Borrowers can avail of tax exemption under Section 80E.
A few banks also offer some concession on the interest rate to their existing customers with a good credit score.
Banks may offer a concession (up to 1%) in ROI on the principal loan amount if the interest amount is paid in full during the moratorium period, or during the course of study.
A few banks may charge additional interest as risk premium (up to 0.05%) if the lender has not obtained credit life insurance, which ensures that debts are settled after insurers’ demise.
Interest Rate of Public Sector Banks
The Government of India has merged a few public sector banks hence the interest rates of the merged banks will be that of the bank they are merged with.
Content Courtesy: https://www.forbes.com/advisor/in/loans/education-loan-interest-rates/
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