When applying for an education loan, students often need to decide between a bank and a Non-Banking Financial Company (NBFC). While both provide financial assistance, they differ in loan processing, interest rates, repayment terms, and eligibility criteria. Understanding these differences can help students choose the best financing option for their education.
NBFCs vs Banks: Key Differences
Although both banks and NBFCs offer education loans, their lending policies and structures differ in several aspects. Here’s a detailed comparison:
1. Regulatory Framework
- Banks operate under the Banking Regulation Act, 1949, and are strictly regulated by the Reserve Bank of India (RBI). They must follow stringent compliance measures, ensuring stability and security for borrowers.
- NBFCs, on the other hand, are governed under the Companies Act and are also regulated by the RBI, but they have greater operational flexibility. This allows them to provide innovative financial solutions with fewer restrictions.
2. Loan Processing Time
- Banks usually take longer to process education loans, typically between 7 to 21 days, as they follow a structured approval process involving extensive documentation and verification.
- NBFCs, in contrast, offer faster approvals, often processing loans within 3-5 days. This quick turnaround is beneficial for students who need urgent financing, especially for admissions abroad.
3. Interest Rates
- Banks generally offer lower interest rates on education loans due to their access to public deposits. However, their strict eligibility criteria may make it difficult for some students to qualify.
- NBFCs may charge slightly higher interest rates but compensate with flexible eligibility norms, customized repayment options, and collateral-free loans, making them accessible to a broader range of students.
4. Loan Coverage
- Both banks and NBFCs cover expenses like tuition fees, accommodation, travel, and books. However, banks typically restrict loans to recognized institutions and traditional courses.
- NBFCs offer wider coverage, financing unconventional and specialized courses, including diploma programs, online certifications, and skill-based education, both in India and abroad.
5. Repayment Terms
- Banks provide longer repayment tenures, extending up to 15 years, reducing the burden of monthly EMIs. They also offer a moratorium period, allowing students to start repayments after completing their course.
- NBFCs may have shorter repayment periods, leading to slightly higher EMIs. However, they often provide flexible repayment structures, allowing students to choose customized plans based on their financial situation.
6. Loan Eligibility Criteria
- Banks have strict eligibility requirements, including high academic scores, a co-applicant with stable income, and collateral for larger loans.
- NBFCs offer more relaxed criteria and collateral-free loans for select courses, making financing more accessible.
7. Processing Fees
- Banks charge a fixed processing fee of ₹10,000-₹20,000.
- NBFCs charge 1-2% of the loan amount, which benefits students taking smaller loans.
Banks vs NBFCs: A Broader Perspective
Banks and NBFCs differ not just in education loans but also in financial services:
Banks:
- Authorized to Accept Deposits: Banks hold savings and current accounts and allow check issuance.
- Wide Range of Services: They offer loans, credit cards, and wealth management.
- Part of the Payment System: Banks facilitate payments via UPI, NEFT, and RTGS.
- Deposit Protection: Customer deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- Strictly Regulated: Banks follow the Banking Regulation Act, 1949.
NBFCs:
- Specialized Financial Services: NBFCs focus on loans, leasing, and investment products.
- No Demand Deposits: They do not accept savings or current account deposits.
- Independent Lending Models: NBFCs offer flexible, faster loan approvals.
- Not Part of the Payment System: They focus on credit services instead of payment processing.
- Regulated by the RBI: Governed under the Companies Act for financial stability.
Students who don’t meet traditional bank requirements often turn to alternative financing. For such cases, NBFCs offer practical solutions, especially when seeking an Education Loan Without Collateral for Students.
Benefits of Choosing NBFCs for Education Loans
NBFCs like Propelld offer several advantages for students seeking a flexible and fast loan process:
- Quick Loan Processing: Faster approvals help meet urgent admission deadlines.
- Collateral-Free Loans: Many NBFCs, including Propelld, provide unsecured education loans.
- Flexible Loan Terms: Customizable repayment options suit different financial needs.
- Broader Course Coverage: NBFCs fund a wide range of programs, including niche courses.
How to Choose Between a Bank and NBFC for Your Education Loan
Selecting between a bank and an NBFC depends on factors like loan amount, interest rates, eligibility, and processing speed.
- Choose a Bank if: You qualify for lower interest rates, require a longer repayment period, and can provide a co-applicant or collateral.
- Choose an NBFC if: You need quick loan approval, require flexible eligibility norms, or are enrolling in a course not typically covered by banks.
As students weigh their financing options, it’s worth exploring how modern NBFCs like Propelld are reshaping education loans with a focus on accessibility, speed, and student-centric features.
Conclusion
Both banks and NBFCs serve as reliable sources for education loans, but they cater to different borrower needs. While banks offer lower interest rates and extended repayment terms, NBFCs provide faster approvals, flexible eligibility, and wider course coverage. Understanding these differences will help students make informed financial decisions for their higher education journey.
FAQs
What are the eligibility requirements for an education loan from a bank?
Banks typically require a good academic record, a co-applicant with a steady income, and collateral for higher loan amounts.
Are education loans from NBFCs easy to get?
Yes, NBFCs usually have more flexible eligibility criteria compared to banks, making them more accessible to a broader range of students.
Which is better for fast loan approval, a bank or NBFC?
NBFCs are known for faster loan processing and approval times compared to banks.
Can I get an education loan without collateral from an NBFC?
Yes, many NBFCs offer unsecured education loans for specific courses, eliminating the need for collateral.
Do NBFCs offer loans for studying abroad?
Yes, NBFCs often provide loans for international studies and may cover a wider range of courses compared to traditional banks.
What expenses do education loans typically cover?
Education loans generally cover tuition fees, examination fees, library charges, laboratory fees, purchase of books, equipment, and sometimes travel expenses for studies abroad.
Is there a tax benefit on education loans?
Yes, under Section 80E of the Income Tax Act, the interest paid on education loans is deductible from taxable income for up to 8 years.
Can I apply for an education loan before securing admission?
While you can initiate the loan application process, most lenders require proof of admission before final approval and disbursement of the loan amount.
What is the typical repayment tenure for education loans?
Repayment periods vary but typically range from 5 to 15 years, depending on the lender’s policies and the loan amount.
Do lenders provide a grace period before repayment starts?
Yes, most lenders offer a moratorium period, usually covering the course duration plus an additional 6 months to 1 year, allowing students time to secure employment before beginning repayment.
Can I prepay my education loan?
Yes, most lenders allow prepayment of education loans. However, some may levy prepayment penalties or have specific terms regarding early repayment.
What happens if I default on my education loan?
Defaulting can lead to legal action, negatively impact your credit score, and affect future borrowing capabilities. It’s crucial to communicate with your lender if you’re facing repayment difficulties to explore possible solutions.
