Indian v/s International lender: which one should you pick?
Global aspirations have become a reality for many middle class Indians in recent times. With over 750,000 Indian students studying abroad in 2020 (up from 66,000 in 2000), it has also resulted in a boom for education loan providers.
Thanks to this healthy competition between domestic (regulated by RBI) and international lenders (regulated by foreign entities/benchmarks like LIBOR) for providing good student loans, it has become really difficult to choose between either one. Careful consideration and analysis is essential for making the right choice. After extensive market research, our team at GradRight came up with a list of criteria that you should consider before deciding to go with either domestic or international education loan providers:
Interest Rate Parity
International lenders tend to keep their interest rates between 6-11%, Meanwhile, domestic lenders provide higher interest rates at 9-14%. Additionally, domestic lenders offer floating interest rates which generally increase with time, while international lenders offer an option of choosing between fixed or variable rates.
Given the obvious advantages of a lower and fixed interest rate, it immediately makes more sense to choose an international lender. However, you must consider interest rate parity. Despite a lower interest rate, you might still end up paying more for an international loan because of currency value fluctuations. It might also cost you more to pay back an international loan if you choose to return back to pursue a career in India (foregoing a relatively higher salary) or are unable to secure a job overseas.
So, before taking on a domestic or international loan, it is advisable that you consider your future plans and account for possibilities like currency fluctuations.
Cosigner/Collateral requirement is a prominent feature of most education loans. A co-signer is someone who agrees to pay back the loan on your behalf if you are unable to do so. On the other hand, collateral is something of value that you pledge to the lender as security. In the event that you are unable to pay back, the lender has the right to seize your collateral.
While all domestic lenders require you to fulfil either of the two conditions mandatorily, most international lenders don’t. International lenders, in fact, don’t require you to pledge collateral at all. However, pledging collateral (for domestic lenders) and having a co-signer (for international lenders) can help you get better terms.
Domestic players charge between 0.2% – 1.5% of loan amount as processing fees. On the other hand, international ones charge 2% – 5%.
Because of all the additional fees (including the processing fee) you pay, your loan can still burn a hole in your pocket if you’re not careful. Therefore, when choosing between loan offers, it’s best to pick the one which levies the most lenient charges on you.
Application Process and Eligibility Criteria
Domestic lenders tend not to have very strict eligibility criteria. They usually only require you to meet strict criteria of a valid collateral or co-signer, and don’t have a specific list of approved programs. Because of their non-uniform evaluation processes, domestic lenders might take three days to a month to process your application.
International lenders, on the other hand, have very strict eligibility criteria. Most of them tend to have a definite list of approved schools and programs. Documentation is very minimal with them so long as you match the criteria. The entire process is digital and takes about a week to complete.
Tax Breaks and Other Benefits
With all domestic banks and a few private lenders, you may be able to avail a tax benefit under Section 80(E) of the Income Tax Act 1961 for 8 years. The deduction involved is only applied on the interest paid.
Unfortunately, you will not be able to avail any such benefits with an international lender.
In another time, taking a loan was as simple as going down to your neighbourhood bank, looking at your options and finalising the paperwork. But now, because you have a multitude of education loan providers to choose from, the probability of picking a bad loan has also increased. So it becomes really important to assess all your options (domestic or international) carefully and then pick one which is fulfils your needs and is affordable for you and your family. At GradRight, we’ve recognized the need to enable students to make an informed choice when considering their education and financial future. Our online platform allows students to connect with and compare personalized offers from multiple lenders. It’s simple, easy to use and free to try!