The rate of interest is the sum of money levied on the principal loan amount by a lender. If a person borrows money from someone, one has to pay a monthly sum that is more than the principal amount. In literal terms, it is the price of borrowing money from a bank or any other financial institution.
The difference in the rate of interest for study abroad:
As far as abroad education loans are concerned, even a small difference in the rate of interest per year can make a noteworthy difference in the total amount repaid!
Comparison in the rate of interest for overseas students:
As in 2021, the leading banks have the following starting rate of interest. Depending on the borrower’s profile the education loan interest rates differ and secured loans have a lower rate of interest than unsecured loans:
- State Bank of India – 7.65 % p.a.
- Bank of Baroda – 7.75% p.a.
- Axis Bank – 11.25% p.a.
- ICICI Bank – 11.5% p.a.
- HDFC Credila- @ 11.0% p.a.
- Avanse – 11.75% p.a.
- InCred – 11.75% p.a.
- Auxilo – 12.7% p.a.
Different types of Interest Rates
Interest rates can be classified into floating and fixed interest rates:
If floating the rate of interest can:
- increase or reduce through the loan duration.
- Market conditions determine changes in interest rates.
- Less volatile interest rates are offered by public sector banks.
If fixed the rate of interest:
- Cannot change during the loan tenure.
- EMIs stay the same amount.
- It is easy for the borrower to budget due to the certainty element.
Types of Interest Rates offered by different banking institutions:
Public Sector Banks:
The two most popular ones are:
- State Bank of India: 8.65% per year, with an extra 0.50% subsidy for girl candidates, and an additional 0.5% for Rinn Raksha credit life insurance.
- Bank of Baroda: The interest rates can be further classified into two categories:
- 8.25% annually for boys and 7.75% for girls for listed institutions.
- 8.9% for boys, 8.4% for girls for the unlisted institutions.
Remember: Rate of interest is linked to MCLR
Private Sector Banks:
The applicant’s profile decides the exact rate of interest.
- Axis Bank: Their interest rates start at 11% a year.
- ICICI Bank: Beginning at 10.50 % annually.
Based on the candidate profile the exact rate of interest is decided:
HDFC Credila: Starts at around 11% a year.
Avanse: They offer around 12.65% annually.
InCred: Their per annum rate of interest is 11.75%.
Auxilo: They charge around 12.70% annually.
How to calculate an EMI?
The total sum repaid on a monthly basis is called Equated Monthly Installment. (EMI).
The simplest way of calculating it is: Principal Amount + Interest Amount =EMI
How is the rate of interest calculated for education loans?
There are two simple ways to calculate the rate of interest:
- The formula for Simple Interest
- Simple Interest = Principal Amount x Rate of Interest x Time/100
For Instance – you borrow INR 50,000 for 1 year at a 5% rate of interest, then after applying the formula, it amounts to INR 2500 as interest. When returning the borrowed sum, an extra payment of INR 2500 as a fee has to be made.
- Formula for Compound Interest
- A = P (1 + r/n) ^ nt
Here, A means the compound interest total, P is the principal sum, r is the per year rate of interest, n signifies the number of times the interest becomes compounded annually, and t denotes the number of years.
Let’s suppose, the borrowed amount is INR 10 lakhs at a 10% interest rate for 5 years. The full interest on this sum is INR 4,97,916.
- Total interest to be compensated – 4,97,916
- Total Payment = (Principal + Interest) – 14,97,916
- Per month EMI – 24,965
The interest levied is an amalgamation of both in an education loan, During the course of study, simple interest is charged, soon after which, compound interest starts to incur.
When does the rate of interest in an education loan begin?
The rate of interest on an education loan begins as soon as the amount is credited to the applicant’s bank account. While the study course is in progress, most lenders levy simple interest. Six months after the completion of the study period compound interest is charged.
For abroad education loans, you can get in touch with GyanDhan and get guidance at every step of your loan process. Contact them now and ward off all your funds-related stress.
Guest Blog by GyanDhan