Funding higher education is a big financial step for students, and choosing the right loan can make all the difference.
When it comes to deciding between personal loan vs education loan, students and parents often find themselves weighing the pros and cons. While both options can finance tuition and related expenses, the difference between personal loan and education loan lies in interest rates, repayment terms, and eligibility criteria.
An education loan is meant solely for academic needs, and often comes with lower interest rates and a moratorium period. On the other hand, a personal loan is multi-purpose and often comes with quicker processing.
This guide will help you understand which loan suits your financial situation and works the best for your academic journey.
What is an Education Loan?
An education loan is a type of loan specially designed for education, where one cannot take this loan for any other purpose except education. These loans are extremely popular among students and working professionals as these loans are provided by government schemes, banks, and even private lenders.
Education loans are mostly collateral-based loans, but the interest rate ranges on the lower side. If one doesn’t have any collateral, then they can also take a loan based on the third-party guarantee, which means if in future one is unable to pay the loan, the third party guarantees to pay the same on behalf of them and thus, they have sanctioned the loan based on the same.
What is a Personal Loan?
A personal loan is a form for any purpose known to the borrower with flexible interest rates and is collateral-free. It is also mostly available as a substitute for an education loan as it is comparatively easy to avail, and there are no restrictions or eligibility criteria for the same except the credit score.
Difference Between Personal Loan and Education Loan
Let’s understand the key differences when we compare education loan vs personal loan.
Basis of Difference
Education Loan
Personal Loan
Utilization of Funds
These loans can only be utilized for funding one’s education. The amount can cover costs such as tuition fees, books, accommodation and related expenses.
The borrower can use the funds for any purpose – education or otherwise. There is no restriction on the usage of funds.
Rate of Interest
Education loans generally feature lower interest rates.
Being unsecured loans, personal loans usually feature higher interest rates. However, the final rate of interest depends upon the borrower’s financial profile.
Tax Exemptions
Under Section 80E of the Income Tax Act, one can claim a deduction on interest payments.
There are no provisions for tax exemption on a personal loan.
Moratorium Period
The moratorium period is only available for education loans, where repayment is kept on hold during the student’s education. This grace period allows students to focus on their studies and repay once they secure a job.
There is no moratorium period associated with personal loans. These require borrowers to begin the repayment as per a pre-determined schedule.
Guarantor and Collateral
Education loans require one to provide either a guarantor or collateral.
Personal loans do not require collateral or a guarantor for eligibility.
Benefits of an Education Loan
Pursuing higher education, especially in reputed institutions in India or abroad, can be financially challenging. This is where education loans come in, offering financial assistance to students and their families. However, like any other loan, education loans come with both advantages and limitations.
Moratorium Period: One of the biggest advantages is the moratorium or repayment holiday associated with an education loan. Most Indian lenders offer a grace period (typically course duration + 6 to 12 months), during which repayment isn’t required. This gives students time to complete their course and find a job before starting EMIs.
Designed for students: Education loans are designed to fit the needs of students, covering all their educational expenses such as tuition, accommodation, cost of study materials, etc.
Tax exemptions: Under Section 80E of the Income Tax Act, borrowers can claim a tax deduction on the interest paid on education loans for up to 8 years, easing the repayment load further.
Eases financial burden: Education loans cover a wide range of academic expenses including tuition fees, accommodation, books, and travel. This allows students to pursue their dream courses without putting immediate financial pressure on their families.
Builds credit history: Repaying an education loan responsibly can help students in building a positive credit history early in life. This is especially beneficial for their future financial needs such as home loans, car loans, wedding financing, etc.
Drawbacks of an Education Loan
Extensive application process: The application process for an education loan requires extensive documentation and proof of admission. Because of the multiple documents and approvals involved, the disbursal can sometimes be delayed, especially affecting last-minute admissions or deadlines.
Collateral: Applicants must provide collateral to be eligible for an education loan. If they cannot produce collateral, they may opt for a third party guarantor.
Uncertain job market: If students are unable to secure a job soon after graduation, repaying the loan can become stressful and may affect their credit score.
Coverage: Some lenders only approve loans for recognized courses or reputed institutions. Students enrolling in colleges that are not as well-known can find it difficult to secure financing.
Benefits of a Personal Loan
When it comes to funding higher education or related expenses, some students and parents consider a personal loan as an alternative to education loans. While personal loans offer flexibility and quick access to funds, they also come with their own set of pros and cons.
Flexible spending: One of the major advantages of a personal loan is its flexibility.There is no restriction on the usage of funds under a personal loan. These can be utilised for any expenses, not limited to education.
Fast access to funds: Personal loans usually involve less documentation and faster approvals. This is especially helpful for students or parents needing urgent funds for admissions or related expenses.
No collateral requirement: Most personal loans are unsecured, which means you are not required to pledge property or assets as security. This is ideal for students or parents who may not have suitable collateral.
Flexible repayment options: If you wish to repay the amount quickly, personal loans offer flexible repayment terms, making them suitable for those with stable income or a clear repayment plan.
Immediate eligibility: Students can apply for a personal loan as soon as needed, without requiring documentation like admission confirmation.
Pre-approved offers: Many lenders offer pre-approved personal loans to salaried individuals, especially if they have a long-standing relationship with the institution. This makes it easier for parents to take quick loans for their child’s education needs.
Drawbacks of a Personal Loan
High interest rates: Personal loans have higher interest rates than education loans, making them more expensive in the long run.
Immediate repayment: Unlike education loans, personal loans do not offer any grace period. Repayment starts immediately after disbursal, which can be a burden for students who haven’t started earning yet.
No tax benefits: Unlike education loans, personal loan repayments do not qualify for tax deductions under the Income Tax Act.
Conclusion
Education loans and personal loans are both suitable means of financing higher studies.
Education loans are more suited to students because they offer a moratorium period which means students can focus on their studies and repay the loan after securing a job. It’s designed specifically for learners and covers all education-related costs with added benefits like a moratorium period and Section 80E tax deductions.
However, if you need funds urgently, don’t meet the strict eligibility of education loans, or want flexibility in spending (such as for travel, gadgets, or living expenses), a personal loan may be more practical. It comes with faster disbursal, no usage restrictions, and minimal documentation.
Ultimately, when you make a personal loan vs education loan comparison, the right choice depends on your financial needs, eligibility, and repayment capacity.
Both loans have clear pros and cons. Carefully assess your situation, compare interest rates, repayment terms, and loan conditions before deciding.
Whichever option you choose, ensure you have a solid repayment plan in place for a financially responsible future.
Taking an education loan isn’t risky if planned well. Timely repayment, choosing reputed courses, and understanding loan terms can help you manage your debt effectively and build a strong credit history.
Which loan is best, an education loan or a personal loan?
Education loans and personal loans have their own benefits. Ultimately, when you compare a personal loan vs education loan, the right choice depends on your financial needs, eligibility, and repayment capacity.
Is an education loan interest-free?
Education loans are not interest-free, but often feature lower interest rates than personal loans.
Can I use a personal loan for education?
A personal loan can be used for any purpose, including education. Students who are not eligible for an education loan or working professionals prefer to opt for a personal loan to finance their education.
Why is a personal loan better than an education loan?
A personal loan does not have a restriction on its usage unlike an education loan, which can only be used for educational costs. A personal loan can be used to cover any additional expenses. It also offers a faster means of acquiring the funds in case of an urgent requirement, unlike an education loan, which follows a much more tedious approval process.
05 May 2025
7 mins read
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