Bank vs NBFC Education Loans: Which One Should You Choose?

For students planning to pursue a degree abroad, the chaos doesn’t end with university applications or the visa process. Just when you think the hard part is over, finances come into play. Figuring out how to budget for your degree and secure funding can be overwhelming. For many students, funding usually comes in the form of an education loan, which raises a new set of questions.

How much should you borrow? From whom? Which lender can you trust? How does interest work, and under what terms? Making these financial decisions can have long-term consequences that are not always easy to undo. Loans are not a one-size-fits-all solution, and the right choice depends on several factors that many students may not even consider.

Let's break it down to the basics, starting with one of the most common dilemmas students face: Should you take an education loan from a bank or an NBFC?

Types of Education Loans

The first thing you must know is that not all education loans are structured in the same way. Broadly speaking, education loans fall into two categories– secured and unsecured. 

Secured/ Collateral Loan

These loans require collateral, usually an immovable asset such as property or a fixed deposit. Secured loans typically have higher loan amounts and lower interest rates.  

Unsecured/ Non-Collateral Loan

These loans do not require collateral, so the decision to lend depends on your academic profile, the university you’re going to attend and your family income. These loans have a faster process and more accessibility, but come with higher interest rates.

Now here’s the highlight: both banks and NBFCs offer secured and unsecured loans, but their evaluation processes and costs differ. Banks usually prefer secured loans and often require collateral for amounts over ₹7.5 lakhs. Unsecured loans from banks come with stricter criteria, including a solid family income and a CIBIL score, typically limited to top university students. 

Whereas NBFCs are more flexible with unsecured loans, considering factors such as university ranking, course, and future earning potential rather than collateral.

Bank vs. NBFC

Banks and NBFCs are the two main lenders for education loans in India. While both can fund your studies abroad, they operate quite differently. Here’s a comparison of the key aspects.

Critera	Banks	NBFCs
Interest Rates	8-11%	11-14%
Loan Amount	Unsecured: up to ₹50 Lakh;  Secured: up to ₹ 1 Crore or more	Unsecured: up to ₹ 1 Crore;  Secured: more than ₹ 1 Crore
Processing Time	4-6 weeks	1-2 weeks
Approval Flexibility	Strict– CIBIL score, Income Tax Returns	Lenient– Return on Investment, Academic Profile
University Coverage	Usually includes the top 100-150 universities according to the QS World University Rankings.	Broader coverage
Tax Benefit	Fully eligible	Eligible if the NBFC is a recognised financial institution registered with the RBI

Important Factors to Consider

Deciding between a bank and an NBFC for an education loan is not only about comparing interest rates and processing timelines. It is a long-term financial commitment with many more aspects to consider than selecting a suitable lender. 

Collateral Requirement

When applying for a secured education loan, you should understand what can be used as collateral. Typically, banks and NBFCs require immovable assets, such as property or land, or financial assets, such as fixed deposits or LIC policies. 

Banks tend to be more collateral-focused, particularly for larger loan amounts, while NBFCs may provide unsecured options based on the applicant's academic profile and career potential.

Loan Coverage

Not every education loan covers the same expenses. Tuition fees are the primary component, but students should check with their lenders whether they cover living expenses, travel costs, visa fees, insurance, study materials and accommodation. 

Margin Money

Margin money is a portion of the total education cost that a student must finance independently. This indicates that the lender covers only a certain percentage of the overall education expenses for studying abroad through the loan.

Banks often have stricter margin money requirements, while NBFCs may offer more flexibility.

Moratorium Period

The moratorium period is the time when students are not required to start repaying their education loans. This period usually includes the course duration, along with a grace period of 6 to 12 months after graduation. 

However, some lenders may still require you to pay interest during this time, which can significantly impact the total repayment burden later on.

Forex conversion impact on EMIs

For students aiming to study abroad, currency fluctuations can significantly affect the total financial requirements for education. If the rupee weakens, it may increase tuition fees, living costs, and other necessary expenses.

Processing Fees & Hidden Charges

When taking an education loan, interest is not the only cost. Additional expenses such as processing fees, administrative charges, legal fees, insurance costs, and collateral valuation fees can significantly increase the overall cost of borrowing.

Prepayment & Foreclosure Charges

Many students opt to repay their education loans early after securing a job. Prepayment (partial repayment) or foreclosure (full repayment) can help reduce the interest burden and allow you to close the loan more quickly. 

However, you should check the T&C of your loan beforehand, as some lenders may impose penalties for early repayment. Moreover, in the case of foreclosure, you cannot claim tax deductions on the interest paid.

Disbursement Flexibility

Education loans are usually disbursed in stages, either on a semester basis or according to the university's requirements. Delays or inflexible disbursement structures can lead to financial stress, especially for living expenses or urgent payments. A lender offering flexible disbursement can facilitate a smoother transition.

When to Choose a Bank?

A bank can be the right choice when–

• You want lower interest rates and long-term savings

• You have sufficient time to complete all formalities

• You can handle a longer documentation and approval process

• You have collateral to apply for a secured loan

• Your co-applicant has a stable income and a strong CIBIL score

• You are enrolled at a well-recognised university, particularly one within the top 100-150 QS-ranked universities.

Top Banks for an education loan in India

State Bank of India

Bank of Baroda 

Union Bank of India 

ICICI Bank 

IDFC FIRST Bank 

Axis Bank 

Canara Bank

Punjab National Bank

When to choose NBFC?

An NBFC can be the right choice when–

• You are comfortable with higher interest rates

• Your financial profile does not meet traditional banking criteria

• You require faster loan approval due to tight deadlines

• You do not have any collateral to offer for a secure loan

• Your academic profile is strong, but your co-applicant's income is limited 

• Your course or university is outside the preferences of banks  

• You need more flexibility in the disbursement of the loan

  
  

Top NBFCs for an education loan in India

Credila

Avanse

InCred

Auxilo 

What We Do to Help You Through Your Education Loan Process 

The process of securing an education loan begins after you choose a suitable lender. This involves comparing loan offers, discussing the disbursement structure, and managing documentation. Overall, the procedure can be complex and time-consuming, especially while you are already handling your university application and visa process.

This is where a professional comes in handy. At  TFM Overseas Education Consultants, as part of our end-to-end study abroad support, we also assist students throughout their education loan journey. 

1. We help identify suitable lenders based on:

• Academic profile

• Financial background

• Chosen university

• Funding requirements

2. Our loan team helps you with all the documentation, application processing and coordinates directly with lenders for a faster, streamlined process. 

   
   

3. Once your loan is approved, we assist in:

   • Evaluating the offer

   • Negotiating better interest rates or more favourable loan terms

Book a free consultation session today and let us help you build your entire study abroad journey from scratch!

Frequently Asked Questions (FAQs)

1. Can a student apply for an education loan independently, or is a co-applicant mandatory? 

Ans. Most lenders require a co-applicant, usually a parent or guardian, because students typically do not have an independent income when applying. However, some NBFCs consider applications more flexibly if the student has a strong academic profile.

2. Is it possible to get an education loan if my university is not well-ranked? 

Ans. Banks are stricter about loan approvals and usually prefer universities ranked in the QS top 100. Whereas NBFCs are more flexible and accept a wider range of universities, but the interest rates and loan amounts they offer may change based on how employable they think graduates from those universities will be.

3. Do I pay anything during the moratorium period? 

Ans. Some lenders offer a full moratorium during which you don’t have to make any payments. But many lenders also charge simple interest during this time. If you don’t pay this interest, it gets added to your principal, making your total repayment higher.

4. What is the tax benefit on education loans, and how does it work? 

Ans. When you repay an education loan, your monthly payment has two parts: the principal and the interest. You can deduct the interest from your taxable income under Section 129 of the Income Tax Act 2025 (formerly Section 80E), which lowers your tax for that year. There's no limit on how much interest you can deduct, and you can claim this benefit for up to 8 years after starting repayment.