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While both provide financial assistance, there are significant differences between them in terms of what they offer, their eligibility criteria, interest rates and other crucial factors, points out Prashant A Bhonsle.
It is important to shed light on the disparities between banks and NBFCs when it comes to student loans and helping students make informed decisions about their educational financing options.
Higher education is becoming more expensive as time passes and many students and their families are turning to loans to ease the burden of tuition fees and other educational expenses.
Banks and Non-Banking Financial Companies are the two primary sources of student loans.
Banks vs NBFCs
Banks are traditional financial institutions that offer a wide range of services and various types of loans, including student loans. They are known for their stability and long-standing presence in the financial industry.
NBFCs are non-banking entities that provide financial services like loans and advances. They do not hold a banking license.
Since they are not as heavily regulated as banks and have more flexibility in their operations, NBFCs often have more room for innovation in their loan offerings.
They may cater to specific niche markets, including student loans.
Eligibility Criteria
The eligibility criteria for student loans can vary significantly between banks and NBFCs.
Banks usually have stringent requirements that may include academic performance, admission to recognised educational institutions and collateral for higher loan amounts.
They may also consider the credit history and financial standing of the borrower or their co-applicant.
On the other hand, new age fintechs and NBFCs -- who are armed with modern technological tools -- have a more relaxed eligibility criteria and less stringent collateral requirements which makes it easier for students from diverse backgrounds to secure funding for their education.
Interest Rates
Interest rates are a critical factor in any loan and the rates offered by banks and NBFCs can differ significantly.
In general, banks offer more competitive interest rates on student loans due to their access to low-cost funds from deposits and their lower risk perception.
Since NBFCs are non-banking entities, they may have slightly higher interest rates to compensate for their higher cost of capital and risk appetite.
However, NBFCs may also provide more competitive interest rates compared to banks for borrowers with less-than-ideal credit histories.
It is essential for borrowers to compare all terms and conditions, and not only interest rates, to determine the most suitable option.
Collateral Requirements
Banks typically require collateral for higher loan amounts, especially for unsecured loans. Collateral serves as a security measure for banks to mitigate the risk of default.
In the context of student loans, banks may require collateral or a co-signer for substantial loan amounts.
NBFCs may offer unsecured student loans which means they do not require collateral or co-signers. This can be beneficial for students who do not have valuable assets to pledge as security.
Loan Amount and Flexibility
Banks are likely to cover the entire cost of education, including tuition fees, accommodation and other expenses.
NBFCs may offer more flexible loan amounts. Moreover, some NBFCs might offer additional benefits like customised repayment plans or top-up loans for further studies, providing more options for students.
Loan Disbursement Process
Banks generally have a well-established loan disbursement process with predefined stages, including verification of documents and direct payments to educational institutions. This structured process ensures transparency and efficiency in the disbursement of funds.
In contrast, NBFCs might have a more streamlined and a fully digital faster approval process, leading to quicker loan disbursal. This could be accompanied by slightly less rigidity in the application and verification procedures.
Moreover, NBFCs may provide more flexible repayment options, including shorter repayment terms, which can drastically reduce the overall interest burden for the student.
Conclusion
Both banks and NBFCs play crucial roles in providing financial assistance to students pursuing higher education.
Banks offer lower interest rates while NBFCs provide greater accessibility to loans for individuals with limited credit history.
NBFCs may have more flexible loan terms and disbursement options.
Students should carefully evaluate their financial situation, creditworthiness and loan requirements to make an informed choice that aligns with their educational aspirations and future financial goals.
Prashant A Bhonsle is the CEO & Founder, Kuhoo Technology (external link).
Disclaimer: This article is meant for information purposes only. Any use of the information is at the reader's sole discretion and risk.
Any advice herein is made on a general basis and does not take into account the specific objectives of the specific person or group of persons.
Opinions expressed herein are subject to change without notice.