A child’s education is something that every parent refuses to compromise on. Although best education is a priority for most Indian parents, not many can fulfill their dream without incurring financial debt. The rising cost of education, pegged at the inflation of 10%, can be concerning to many parents. This extreme inflation makes loans a necessity. The financing options to fund your ward’s education may include Loans against property (LAP) and education loans.
Banks provide education loans against collateral like property that could be residential or commercial. Even though the underlying concept includes a loan against property, the difference between an education loan and a standard LAP is the goal of the loan. This changes the way financial institutions perceive the loan. We hope to discuss the details of both these schemes to help you make an informed decision.
Loan Against Property (LAP)
- The loan amount is dependent on the property’s market value. Schemes like PNB’s housing loans against property include personalized doorstep service, a 20 Years Loan tenure, customized eligibility program for both salaried and self-employed individuals and a number of payment options.
- In case the borrower defaults, the lender can recover the loan amount by selling off the property pledged as collateral. This ensures that the interest rate on these loans is low and makes the process of getting a LAP easier.
- The tenure for LAP is longer than that of education loans and can last up to 20 years. The increased tenure reduces the monthly EMIs incurred with a loan against a property’s interest rate.
- LAP provides greater flexibility when it comes to using the money as the disbursed amount is handed over to you. You can use the amount as you deem fit, be it to cover your child’s living expenses or other needs.
- Since an education loan is future-oriented, the student’s earning potential is taken into consideration while determining the risk associated with the loan. This tends to cause the rate of interest to be higher than the loan against the property interest rate.
- The chances of not being eligible for this loan is higher for parents with a low income or self-employed individuals.
- Unlike LAP, in education loans, individuals have the benefit of paying partial or no interest until they get a job. This way, the financial institution does not exert extra burden on parents while taking a loan.
- Provisions under section 80E provide for the interest component to be deducted from the parents’ IT return as the RBI and Government of India is incentivizing higher education.
- The loan amount disbursed is credited directly to the institution or college and cannot be used for other purposes.
- The tenure for education loans is shorter resulting in higher EMIs.
Both LAPs and education loans are prudent modes of financing your child’s dreams. Each has its benefits and pitfalls. Schemes such as PNB housing’s loan against property could help finance your child’s education. But the most crucial step is to decide which scheme can suit your financial goals.