Actual vs quoted interest rate on an education loan

Key Statement/ Fact Sheet or Annual Percentage Rate (APR) on loans have been made compulsory by Reserve Bank of India. At Peaceful Loan, we have been focusing on educating students and parents to look beyond the interest rate quoted on an education loan.

Is interest rate on education loan a true measure of good vs bad loan?

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Interest rate alone is not a measure of a good education loan. We should be comparing many factors like processing fees, fixed or floating interest rate, prepayment charges, insurance cost to cover the loan and many more. We have found it very difficult to convince consumers to look at other aspects of an education loan. Eventually, they hear us out and still ask for education loan final interest rate.

Finally we are glad by the move made by the Reserve Bank of India. Banks are responsible for clearly communicating to the consumers about the cost of the loan. They are compelled to declare the effective cost of education loan in terms of APR – Annual Percentage Rate.

Annual Percentage Rate takes into account all costs like processing fees, insurance cost and any other additional cost and calculates effective cost to the consumer for a loan.

Additional charges in education loan include:

Processing fees – 1-1.5% of sanctioned amount + 18% GST
Insurance amount – 1-2% of sanctioned amount + 18% GST
Pre-payment charges taken by NBFCs despite not being allowed for education loan in lieu of processing charges.

Source of the following image: The Mint https://www.livemint.com/money/what-the-key-fact-statement-says-about-your-bank-loan-11708010143110.html#:~:text=The%20KFS%20is%20a%20one,late%20payment%20fee%2C%20among%20others & Neil Borate from the Mint.

In the following example, interest rate quoted by the bank would be 18%, but the actual interest rate is 20.16%. Now banks and NBFCs are compelled to declare this. Hopefully this brings transparency and healthy competition which will benefit consumers and lenders both.