Know How the Student Loan Interest Rate Works?

Student loans have become increasingly popular in India as a way for aspirants to finance their higher education. Student loan interest rates are an essential aspect of education financing in India. As the cost of higher education continues to rise, students and families are increasingly relying on these loans to cover the expenses. 

According to a recent study by the Central Bank of India, the average interest rate for student loans can range from 10.30% to 10.90%, depending on the type of loan and the financial institution offering it. The Reserve Bank of India (RBI) regulates the interest rates charged on student loans offered by scheduled commercial banks, regional rural banks, and small finance banks. However, there are other financial institutions, such as non-banking financial companies (NBFCs), which also offer student loans customized as per the student’s needs.

Student loan interest rates may vary

As of January 2023, the interest rates for education loans offered by scheduled commercial banks range from 6.90% to 10.50% for loans up to Rs. 7.5 lakhs, and from 7.15% to 11.75% for loans above Rs. 7.5 lakhs. However, it is important to note that these rates are subject to change and may vary based on the borrower’s credit profile and other factors.

Many banks offer lower interest rates ranging from 8.50% to 8.70%. In some cases, for loans up to Rs.4 lakhs, the interest rate is zero.

Student loan interest rate – Overview

The best way to pursue higher education in India without harming your finances is through a student loan, which allows you to borrow money for tuition and other expenses. Borrowing money for courses in India is simple but unemployed students will need a guarantor, such as a parent or a guardian.

There are several financial institutions that offer you the right student loan to meet the cost of education, fees payable to college/school/hostel, exam fees, purchase of books/equipment, travel expenses, purchase of computers essential for completion of the course, and much more. The student loan interest rates are subject to change throughout the duration of the loan.

Factors that determine student loan EMI

There are many factors that determine how much your Equated Monthly Installment (EMI) will be on your education loan. These factors would be:

1. Student loan interest rate
2. Loan amount
3. Repayment tenure

Also Read: 5 Best Tips To Get The Best Education Loan Interest Rate In India

5 tips to get the lowest student loan interest rate

Is it difficult to borrow a student loan in India?

Securing a student loan in India can be a challenge, especially if the interest rate is high. To minimize the financial burden, it’s important to explore options that result in lower monthly payments and a lower overall interest rate. 

Banks and non-banking financial institutions typically offer education loans with interest rates between 9% and 14%. But, these rates are negotiable. Here are five tips to help you negotiate a lower interest rate on your education loan in India:

Academic Record

Your academic record plays a crucial role in determining the approval of a student loan from a bank or Non-Banking Financial Company (NBFC). When it comes to pursuing higher education in India, it’s important to be mindful of your academic performance as it significantly impacts the interest rate you’ll be offered on your loan. To ensure a favorable loan outcome, it’s imperative to maintain a strong academic profile, which demonstrates your ability to repay the loan and instills confidence in the lender.

For instance, if you have a remarkable academic score and are admitted to a reputable college, you are more likely to receive loan approval from a bank. The approval process will be smoother and quicker as your loan application will be evaluated based on your 10th or 12th grade results, as well as other academic achievements. With a solid academic record, you can secure a low student loan interest rate, making it easier for you to repay the loan in a timely manner.

Reputation of the College or University

The reputation of a college or university can significantly impact the interest rate on a student loan. If you have secured admission to a top-ranked educational institute in India, lenders may be more inclined to offer a lower interest rate on your loan. This can have a substantial effect on the overall cost of the loan, including processing fees.

Before making any decisions, it is crucial to take the time to carefully calculate your expenses and determine the amount of loan you require. This will help you make an informed decision and ensure that you take out only the necessary loan amount. Additionally, you may consider opting for an unsecured loan, which typically requires no collateral and offers smaller loan amounts, if that aligns with your financial needs and goals.

Course type

The type of course you choose to pursue can significantly impact the interest rate you’ll receive on your student loans. Typically, courses that offer a higher likelihood of job opportunities, such as engineering or doctoral programs, will often result in lower interest rates. This is because these courses are viewed as having a higher potential for financial success, and therefore, a greater ability to repay the loan.

On the other hand, if you choose to pursue a course with limited job opportunities, such as some humanities or fine arts programs, you may be subject to higher interest rates. This is because lenders may view these courses as having a lower potential for financial success and, consequently, a higher risk of defaulting on the loan.

Therefore, it is important to carefully consider the type, of course, you want to pursue and its potential for job opportunities before applying for a student loan. By doing so, you may be able to secure a lower interest rate, which can help you save money over the life of your loan.

Loan with or without collateral

When it comes to taking out a loan, you can choose between two types: secured and unsecured. The main difference between them is the presence of collateral. A secured loan requires you to pledge an asset as collateral to the lender, whereas an unsecured loan does not. The collateral serves as a guarantee for the lender, providing them with a form of security against the risk of default.

When it comes to student loans, the interest rate you are offered will be determined by the presence or absence of collateral. If you provide collateral such as a house, your interest rate is likely to be lower than if you take out an unsecured loan. This is because the lender has a form of security to fall back on in case of default.

If you are planning to borrow more than 7.5 lakh, then you will need to provide collateral security against the loan amount. The collateral can take many forms, including land, a house, an insurance policy, or a fixed deposit, among others. When you offer collateral, the lender will assess its value and base the loan amount on this.

Income and credit history of co-borrowers

When it comes to applying for a student loan, one option is to have a co-borrower, usually a parent, join in the application. This means that the parent will share the financial responsibility of the loan with the student. To be eligible for a student loan, the co-borrower will need to provide documentation, including proof of income and credit history.

The income and credit history of the co-borrower play a critical role in determining the interest rate for the loan. If the co-borrower has a high income and a good credit score, it will reflect positively on the loan application and increase the chances of getting a lower interest rate on the loan. This is because lenders see the co-borrower’s income and creditworthiness as a form of security, which reduces the risk of defaulting on the loan.

Recently, the Reserve Bank of India (RBI) has lowered the repo rate, which is the interest rate at which the RBI lends money to commercial banks. This means that banks have more funds available to lend, resulting in lower interest rates for loans. As a result, it’s an excellent time for students and their co-borrowers to take advantage of this opportunity and apply for a student loan at a reduced interest rate.

Are student loans worth it?

Here’s why you should always consider taking a student loan:

• Be financially independent
• Reap income tax benefits under 80E of IT Act
• Leverage flexibility during repayment
• Strengthen your credit history

Whether you are an independent student or still rely on a guardian for financial support, you must prove your or the guardian’s financial viability to repay the loan on time so that banks or non-bank financial institutions like Varthana can trust you to provide their services. It is not mandatory for a person to be employed in professional service to provide the necessary financial evidence. Applicants from the business and self-employed sectors are also eligible to apply for Varthana student loans.

Why you should take a student loan in India?

Taking a student loan in India can open doors to higher education opportunities that might otherwise be financially out of reach. With a student loan, you can cover tuition fees, living expenses, and other educational costs, allowing you to focus on your studies without worrying about finances. Additionally, a student loan can help you build a good credit history early in your life, which can be beneficial for future financial endeavors. Moreover, some student loans offer flexible repayment options, making it easier to manage your finances after graduation. By taking a student loan, you invest in your future and pave the way for better career prospects and personal growth.

Benefits of student loan

– Student loans provide you with financial support to pursue higher education without worrying about immediate expenses.
– They help cover tuition fees, books, accommodation, and other essential costs, ensuring you can focus on your studies.
– With a student loan, you can attend your dream college or university, even if you don’t have enough savings or family support.
– Repayment terms are often flexible, allowing you to start paying back the loan after completing your education or securing a job.
– By investing in your education through a student loan, you increase your chances of obtaining better career opportunities and higher earning potential in the future.
– Additionally, student loans may come with favorable interest rates and repayment options tailored to your financial situation, making them a practical choice for funding your education.

Conclusion

Understanding how student loan interest rates work is crucial for managing your finances effectively. By grasping the concept, you can make informed decisions about borrowing and repayment. Remember, the interest rate determines how much extra you’ll pay on top of the loan amount. It’s usually calculated based on the principal balance and can vary depending on factors like your credit score and the type of loan. Monitoring the interest rate allows you to anticipate changes in your repayment amount and plan accordingly. By staying informed and proactive, you can minimize the overall cost of your student loan and achieve financial stability sooner.

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