Should you take out an education loan or personal loan for your higher studies?

Congratulations on making the decision to further your studies! Now that you have taken the big leap of faith, you might be wondering what available options there are in financing your higher education.

Both personal loans and education loans are viable choices. There are a few key differences between the two types of loans. Here, we break down the different types of loans so that you can decide whether an education loan or a personal loan is the right choice for you.

Which is cheaper — Education loans or personal loans?

Education loans are likely to be the cheaper option.

At the first glance, the interest rates charged for personal loans look comparable with education loans. The interest rate for personal loans typically ranges from 3.48 per cent to 4.00 per cent while the interest rates for education loans range from 4.38 per cent to 5.20 per cent per annum.

However, the way interest is calculated for education loans in Singapore is more favourable than for personal loans. Education loans are priced with rest interest rates, as opposed to personal loans which are priced with flat interest rates.

With flat interest rates, the interest is calculated as a flat percentage of the principal loan amount. This means that your interest payment stays constant throughout your entire repayment period. For example,

If you take out a personal loan of $50,000 at an interest rate of 4.99 per cent, the interest paid would be 4.99 per cent x $50,000, which translates to $2,495 per year or $207.91 per month. This does not change regardless of how much money you have already repaid.

On the other hand, with rest interest rates, the interest is calculated based on the remaining balance of your principal loan amount every month.

This means that as you repay your education loan, the portion of your monthly payment that goes towards your interest payment decreases and the amount that goes towards paying down the principal loan amount increases. This translates to great savings in terms of interest payments, because they decrease significantly as more and more of your principal loan amount is paid off.

Below is a table to compare the difference in cost between a personal loan with a flat interest rate versus an education loan with a rest interest rate.

Flat Interest Rate	Rest Interest Rate
Principal	$50,000
Interest Rate	4.99 per cent
Tenure	5 Years
Monthly Installments	$1,041.25	$943.33
Total Interest	$12,475.00	$6,599.96

We can see that even with the same interest rate and tenure, an education loan is significantly cheaper than a personal loan due to the way interest is calculated.

Eligibility criteria of an education loan vs a personal loan

An important thing to note when applying for an education loan as a full-time student is that you will likely need a guarantor to co-sign the loan with you.

As an education loan is a form of unsecured debt, meaning there is no collateral on the loan, most banks require that you be at least 21 years old to apply for an education loan on your own. You would also need to make a minimum annual income of $18,000 to qualify for the loan.

If you do not meet either the age or income requirement, you will have to get a guarantor, typically, but not restricted to, a family member to co-sign the loan with you. The total loan amount that can be granted will also depend on the annual income of you or your guarantor.

On the other hand, personal loans tend to have a higher income threshold. Personal loans typically require that you have a minimum annual income of $20,000 – $30,000 to be eligible to apply. This means that personal loans are more suitable for part-time students who have a steady stream of income throughout their studies.

There are some money brokers, such as Lendela, that offer personal loans to applicants with a monthly income of as low as $1,600, which makes for a good option for part-time students with a limited earning capacity.

• Eligibility
  • $1,600 per month
• Max. loan amount
  • 6x monthly salary
• Min. loan amount
  • $500
• Processing fee
  • Varies
• Approval time
  • 1 day

Reasons to consider a personal loan

Despite the seemingly obvious choice when education loans are more inexpensive than personal loans, there are still many reasons why some opt for personal loans instead of, or together with, an education loan.

Eligibility criteria

There are often more eligibility criteria associated with taking up an education loan than a personal loan. For example, some education loans, such as the POSB Education Loan, require that you attend a local university.

Similarly, other education loans, such as the OCBC Frank tuition fee loan for NUS, NTU and NIE students require that you are enrolled in specific eligible courses. If you are looking to study overseas, or if your course is not part of these predefined eligible courses, you will not qualify for such a loan.

Consider this if you need a student loan and are worried about making on-time payments

• Early repayment Fee
  • N/A
• Late Payment Fee
  • $30
• Age
  • 17 - 65

Consider this if you require an education loan for a local university

• Early Repayment Fee
  • 1 per cent of loan prepaid
• Late Payment Fee
  • $50
• Age
  • 17 & above

In this instance, you may be inclined to apply for a personal loan instead. Personal loans often have fewer eligibility requirements, making them much easier to get approved. The main eligibility criteria for a personal loan that you would have to take note of is the minimum income requirement as stipulated by the lender.

Greater flexibility

Most education loans restrict how you are able to spend the loan amount. Often, the loan is dispersed in the form of a Cashier's Order or a Demand Draft, made payable to your designated higher education institution. This means that you cannot use the loan amount to pay for any other school-related expenses such as buying a new laptop or textbooks.

A personal loan would give you greater flexibility in this case as there are no restrictions on what you can spend your loan amount on. It could be reasonable to consider applying for a small personal loan in conjunction with an education loan so that you are able to use the personal loan to supplement your education loan on education-related non-tuition expenses.

Conclusion

Regardless if you choose to apply for an education loan or a personal loan, both offer you great support in funding your studies so that you are able to focus on your education and not have to worry about financing.

This article was first published in ValueChampion.