Have you noticed how more and more students are heading overseas for higher studies these days? When you look at the latest news from various study destinations you will find that Indians are a big part of this growth and in places like the USA, the UK, Canada, Germany, Australia, and New Zealand, students from China and India make up a large chunk of international students aiming for higher education.
Now, for Indians, there are ample reasons behind this trend, but an important one is the availability of foreign education loans. Almost every financial institution in India —whether Private, Public, or NBFC—offers these loans. But choosing the right institution depends on several factors, with the interest rate being a crucial one. Let us explore how these interest rates are calculated and how each one works. This article makes sure that you save a lot of money in the long run!
When you take an education loan, indeed you will plan for your monthly EMIs, and set a budget to pay back the loan. But sometimes, you might notice your EMI is lower or higher than expected. This fluctuation is due to the different types of interest rates on your loan—either floating or fixed.
Fixed Interest Rates
Fixed interest rates remain constant throughout the loan period. No matter what happens in the financial markets, your education loan interest rate and EMIs will be fixed and do not change. With fixed interest rates, you will know exactly how much you need to pay each month, making it easier to plan your finances. Since the rate doesn’t change, you can set a stable budget without worrying about fluctuations. Generally, fixed rates are higher than initial floating rates. Also, if market rates fall, your fixed rate will remain the same, so you won’t benefit from lower EMIs.
Floating Interest Rates
Floating interest rates vary over the loan period based on changes in the repo rate set by the Reserve Bank of India. This means your interest rate and EMIs can go up or down. But generally, floating rates are lower than fixed rates when you first take the loan. The best part is that if the RBI lowers rates, your EMIs could decrease, saving you money over time.
We know that financial details can be tricky for many. So, to help you understand better, here is an easy-to-read table comparing fixed and floating interest rates:
| Feature | Fixed Interest Rate | Floating Interest Rate |
| Interest Rate | Higher | Lower |
| Market Impact | Not Affected by Market Changes | Affected by Market Changes |
| EMIs | Fixed | Variable (Change with MCLR Rate) |
| Budget Planning | Easier to Plan | A Bit Challenging |
| Benefit | Predictable Payments | Lower Interest Rates if the Market Improves |
Choosing between a fixed or floating interest rate depends on your financial stability and how much risk you can handle. As mentioned earlier, floating interest rates are generally lower and can save you a lot of money if market conditions are favorable.
Let us now dive into how floating interest rates work.
A floating interest rate changes based on financial market conditions. These rates are also called variable rates because they fluctuate over time. When you choose a floating interest rate, you might see terms like ‘MCLR plus X%’ or ‘repo rate plus X%’ in your loan documents. Let us understand both these terms in simpler way.
MCLR (Marginal Cost of Funds Based Lending Rate): This is the minimum interest rate a bank can offer. It is set by the bank based on its own costs and is reviewed regularly.
Repo Rate: This is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks. It influences overall interest rates in the economy.
Suppose the repo rate is 5% and the bank adds 2%, your interest rate would be 7%. If the repo rate changes, your loan interest rate will also change.
Let us say you are taking an overseas education loan. If your loan has a floating interest rate, here is how it might work:
Initial Repo Rate: 5%
Bank’s Added Percentage: 2%
So, your starting interest rate would be 5% (repo rate) + 2% (bank’s margin) = 7%.
If the repo rate increases to 6%, your new interest rate would be 6% + 2% = 8%. If the repo rate decreases to 4%, your interest rate would be 4% + 2% = 6%.
Imagine you borrowed Rs.10,00,000 to study at Queensland University of Technology for a loan term of 10 years. Here’s how your interest might change:
Initial Interest Rate: 7%
Monthly EMI: Around Rs.11,618
If the repo rate goes up to 6%:
New Interest Rate: 8%
New Monthly EMI: Around Rs.12,133
If the repo rate drops to 4%:
New Interest Rate: 6%
New Monthly EMI: Around Rs.11,102
Let us break down how these calculations were done using a simple formula for EMI (Equated Monthly Instalment):
In conclusion, these calculations show how your monthly payments can change with floating interest rates over 10 years if the repo rate goes up and down. Understanding these terms and how they affect your loan can help you make a better decision.
If you are a bit lost in the loan game, consider experts at ÉLAN Overseas Education Loans to be your personal loan guide. They make sure to search all the options and find you the best bank for education loan. With ÉLAN's help, over 37,000 Indian students have secured the best possible loans to study abroad, and you can be the next one. So, approach our ÉLAN Loan experts right away and accomplish your study abroad aspirations without a financial glitch.
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