The student loan has become crucial as the cost of higher education whether in India or abroad has increased. This comes in handy when students face a financial crisis and sometimes need to stake their property and other assets to finance their dream of education. Although there are many options available in the market, ranging from public sector banks, private sector banks and NBFCs to fintech companies, sometimes it becomes difficult to choose the best option as the cost may not be just one of many things to consider.
Here is a list of things that could play a crucial role in determining the right loan product and the right lender.
The first is the interest rate offered by various lenders. “If you take out a student loan from a public sector bank, the average interest rate starts at around 7.75%. In the same private sector bank, the interest rate starts at around 10, 5 percent So it is clear that public sector banks are a good option but when it comes to processing the key you should also pay attention to this because comparatively the processing is very fast in private banks and NBFCs,” says Ankit Mehra, CEO and co-founder of GyanDhan.
Besides the type of bank, there are other factors on which the interest rate depends. Like what course you are taking, what institute you are doing and what is your credit score among others.
“First, students should check if the university/institute has links with banks or NBFCs for student loans. In several cases, these links help to speed up loan processing and reduce overall costs to students. Additionally, the disbursement experience can be quite seamless and hassle-free. University-recognized lenders are generally quite well vetted based on their reputation and service mindset and take additional steps to help the student get the best loan option,” says Ashwini Kumar, Managing Director (India) and Vice President, MPOWER Financing.
Also, interest rates on student loans can be floating or fixed. For variable rate products, the interest rate is made up of two parts: the base rate and the margin. The base rate is a reference rate which can be LIBOR (London Interbank Offered Rate) or MCLR (marginal cost of funds based lending rate). The margin is added to the benchmark based on the risk assessment at the client level.
“The base rate changes over time based on market conditions. With the expectation of central banks raising their rates, base rates will rise in the future, leading to a commensurate increase in the rates offered by lenders. Fixed rate loans will not be affected by rising interest rates. However, fixed rate loans sometimes have reset clauses which, if present, will cause interest rates to increase in the future,” says Mehra.
Kumar adds, “A variable rate product may, in some cases, offer a lower interest rate, but over the life of the loan it has a high probability of being above the fixed rate and at levels that may make the fixed rate much lower rate than variable rate. Remember that your valuable time for education, learning, networking, absorbing a multicultural and diverse environment should not be wasted by the stress of rising variable rates – a fixed rate offers the necessary peace of mind, especially while you are at school.
Another important aspect to look for is the expectation of the lender instead of the loan. For example, secured student loans are the cheapest source of funding because the estimated risk of a secured student loan is lower due to the pledged collateral.
“Conventional wisdom pushes for collateral or other assets like a house, land, etc. or a cosigner who cannot vouch for the loan. Modern and more savvy means of lending have allowed the student to free his parents, family or friends from the stress of obligation and to assume the loan without collateral or co-signer – only according to his own academic potential, this is an important variable that the student should consider when looking for a reliable lender,” says Kumar.
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