What are the Different Types of Interest Rates Lenders Provide for Education Loans?
Education Loan is a financial facility that extends monetary assistance to students aspiring to study in India or abroad. However, it is often held back due to financial constraints. Various public, private, and cooperative banks and NBFCs are financial lenders that offer education loans at different interest rates that cater to all the requirements of students.
While overseas education is getting expensive, it is hard for aspirants to pursue higher education in reputed institutes outside of India. Hence, here financial institutions come into the frame and extend assistance with education loan schemes to promote academic excellence so that bright minds contribute their knowledge to uplift society.
This blog will discuss the types of interest financial lenders provide for education loans.
What are Interest Rates?
An interest rate is money charged on the principal loan amount borrowed from a lender. If you borrow money from someone, you will have to pay some monthly amount over and above the principal amount. Borrowing money from a bank or financial lender is a cost. In abroad education loans, even a slight variation in interest rate per annum can significantly affect the total amount.
Types of Interest Rates
Different types of interest rate present in the financial market are devised according to the needs and requirements. Let’s look at some of the primary types of interest rates.
Fixed Interest Rates
As the name refers, fixed interest rates do not change throughout an education loan’s lifetime. Say you have borrowed an education loan with a 5% fixed interest rate. It implies that you will pay 5% of the loan’s outstanding principal each time payments are due. Fixed interest rates are usually a better deal. While borrowers often get burdened with a higher interest rate, in the long run, they are usually better off taking a loan based on known and certain terms.
Variable Interest Rates
Variable interest rates are interest rates that can change over a lifetime. Suppose you have borrowed an education loan with a 5% variable interest rate. This means you start paying 5% of the loan’s outstanding principal each time payments are due, but the lender can periodically change that rate. As a result, your interest rate might be 6% next year, but the year after, it may drop to 4%.
Prime Interest Rates
The Prime interest rates are those that financial lenders charge their most creditworthy customers. The Regulatory authority sets the funds as the basis for the prime interest rate. The prime interest rate is the most commonly used benchmark financial lenders use when setting their interest rates for various products, such as education loans.
Discounted Interest Rates
The discount interest rate determines the present future cash flows in a discounted cash flow analysis, which helps determine if the future cash will be worth more than the capital needed to fund the loan needed in the present.
Simple Interest Rates
Also known as Regular interest rates, simple interest rates is your basic interest rate. Simple interest rates are the straightforward calculation of how much you have borrowed without correcting for other factors. For example, you might borrow Rs. 10,000 at a 5% annual interest rate. You would pay Rs.500 per year for simple interest.
Now that we have understood the types of interest rates let us understand another financial tool for interest rates.
Annual Percentage Rate
The Annual Percentage Rate is the monthly cost you pay to borrow money, including fees, expressed as a percentage. The Annual Percentage Rate is a broader measure of the cost of borrowing money since it reflects the interest rate and the fees you must pay to get the loan. The higher the Annual Percentage Rate, the more you will pay over the loan’s life.
Final Thought
Education loans can help you cover the cost of higher education. However, borrowers need to know their requirements and take loan options carefully, as interest rates are attached. A slight mistake can cost you financially. That’s why EduLoans provides complete assistance in selecting the right loan with attractive interest rates from trusted financial lenders. So, what are you waiting for? Reach out to our counselors or give us a call.