Collateral for Education Loan: Everything You Need to Know
Many people prefer education loans as a trustworthy and secure way to pay for their education since they offer a number of benefits to both students and their families. The process of education loans, too, has been simplified over the years. Education loans for abroad studies are now hassle-free and practical thanks to the online application, speedy processing, doorstep service, and comprehensive expert counselling.
A leading Indian news organization has mentioned a report by a consulting firm that states that by 2024 the number of students from India planning to pursue higher studies abroad may touch 1.8 million. Also, 42% of those who intend to study overseas are thinking of opting for non-English speaking nations such as Norway, Italy, Japan, France, Sweden, etc. It has also been observed that student-centric lenders offer easy payment options, 100% finance, and other advantages allowing students to continue with their higher education without worrying about their payments.
Check: Eligibility Criteria of Education Loan for Studying Abroad - Documents Required
Since numerous banks and financial organisations in India offer education loans to students, they are allowed to examine and contrast different packages before choosing one. Although the features and services offered by different banks vary, most offer the benefits listed below to students and their families:
- Simple online application
- Section 80E tax advantages
- Flexible payback arrangements
- Long-term moratorium
- No margin funding up to Rs. 4 lakh
To be able to make an educated and prudent decision, it is crucial to obtain all relevant information on education loans for abroad studies in light of the expanding competition. Although some of the financial jargon might be difficult to grasp, doing so can help you select an education loan that best meets your needs.
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Education Loans can be classified into two main types:
- Unsecured Education Loans – Loans without collateral
- Secured Education Loans – Loans with collateral
Before you begin your loan application, you must understand the meaning of collateral, its need, the types of collateral a lender accepts and the difference between education loans with collateral and without. You can also contact India’s leading education loan providers through Shiksha Study Abroad.
What is Collateral?
Students seeking educational loans frequently become perplexed when they hear the phrase "collateral education loan." It's because they are unsure of what it is or what kind of protection they can provide. Collateral is an asset pledged against your education loan. It can be a tangible asset like a house or an intangible asset like a Fixed Deposit.
Why do lenders ask for collateral?
Banks and financial institutions ask for collateral to mitigate the risk. If a student fails to make the repayment of the education loan, the collateral is used towards the payment of the same.
Which types of collateral are accepted?
For the most part, banks accept two categories of collateral as security for loans for international education. If you have a property to pledge, it is always preferable to obtain a collateral education loan from a government bank. Collateral security can be in the form of a house, flat, bungalow, non-agricultural land, fixed deposit, life insurance etc.
What is the difference between secured and unsecured loans?
Education loans secured with collateral are known as secured loans. Many banks and non-banking financial institutions provide education loans without collateral which are known as unsecured loans. Since the risk factor associated with secured loans is lower, the interest rate of a secured loan may be lesser than an unsecured loan.
All banks and NBFCs require parents to be join-borrowers on an education loan. For loans up to Rs. 4 Lakh, an education loan without collateral and co-applicant is granted. For loans above Rs. 4 Lakh and less than Rs. 7.5 Lakh, security in the form of a third-party guarantee may be required. The third-party guarantee is an assurance that if the original borrower fails to repay the loan due to any reason, the third-party guarantor will be legally responsible for making the repayment of the education loan. The lender may choose to forego a third-party guarantee if the net worth/income of the parent (acting as joint borrower) is found satisfactory. Collateral of suitable value is required for all education loans exceeding Rs. 7.5 Lakh.
Different banks and NBFCs accept different kinds of collaterals. However, common assets that can be pledged against your education loan are –
- Tangible Assets – House, Apartment, Bungalow, Shop, Non-agricultural Land, Vehicle etc.
- Intangible Assets – Fixed Deposit, Life Insurance, Stocks etc.
The value of collateral for an education loan required by your bank or NBFC can be equal to, less than or greater than your loan amount. Every student has a different profile and set of requirements. Hence, the value of collateral depends on various factors which include –
- Academic history of the student – It may happen that a meritorious and deserving student does not have an asset to pledge against his/her education loan for abroad studies. In such cases, some banks and NBFCs may provide an unsecured loan. Students with extraordinary merit and an exceptional academic track record have a high probability of getting an unsecured education loan.
- The creditworthiness of the co-borrower – Creditworthiness is a trustworthiness factor determined by the lender after a detailed evaluation of a co-borrower’s credit history, financial status, and net worth/income. It helps lenders analyze the borrower’s capability to repay the loan on time. Students whose co-borrowers have a good credit score, stable income, and a clean financial reputation may get some relief from collateral requirements.
- The reputation of the academic institute – Banks and NBFCs run a high risk of loss in unsecured education loans as the student may not get gainful employment opportunities after course completion. In such cases, the reputation and ranking of the academic institute play a very important role. Students with confirmed admission to top-ranking institutes of the world have a high probability of getting high-paying jobs. Hence, their ability to repay the loan is substantially enhanced.
Check: Best Education Loan Providers in India for Study Abroad
What are the Various Forms of Collateral that Lenders Accept?
In general, secured education loans accept three forms of collateral:
- Immovable Property - Lenders will accept non-agricultural land with a clearly defined border as well as immovable property such as a standalone home, apartment, or plot. Land used for agriculture is not acceptable as collateral. The property will be evaluated by an appraiser hired by the bank. Collateral must be pledged with all of the original property papers, such as the registered sale deed, the authorised plan or map, and any links or chain documents.
- Liquid Assets - Fixed Deposits (FDs), Life Insurance Policies (LICs), and Government Bonds are examples of liquid assets. Since these assets may be instantly transformed into cash, they are purchased at their exact worth. Some considerations for borrowers include keeping their FDs with the same institutions they are borrowing money from. A new FD can be created for the purpose or the loan can be taken out on an existing FD. The FD's holder will continue to receive interest payments as usual. When used as collateral, LIC should be a maturing policy with a set maturity date.
- Third-party Collateral - In the event that the borrower is without collateral of their own, they may pledge third-party collateral held by friends or family members. In this situation, the original paperwork for the collateral must also be presented.
Collateral is required by lenders to minimize the risk of loss. However, the compulsion and value of collateral depend on each student’s profile and financial requirements. Some NBFCs even provide unsecured loans up to Rs.20 Lakh to meritorious students. Weigh your options and select a lender that gives you clarity and a cost-effective education loan.
In case you are facing difficulty in arranging an education loan you may also apply for a loan through Shiksha.
Shiksha has partnered with India’s topmost and trusted loan providers who will assist you in getting an education loan. Find out more!
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About the Author
HDFC Credila, an HDFC Ltd. Company, is India's First Dedicated Education Loan Company. With a specialized focus, and in-depth understanding of the requirements of students who wish to pursue higher education, HDFC Credila offers Customized Education Loans Home Delivered! HDFC Credila has funded tens of thousands of students from India to over 2100 unique educational institutes across 35 countries!
Collateral for Education Loan FAQs
Q. Is it worth studying abroad?
A. Studying abroad can be a highly rewarding experience for several reasons. You can acquaint yourself with a new culture, language, and way of life by studying abroad. It fosters cultural awareness, broadens your horizons, and improves your comprehension of various viewpoints. High-quality education and chances for cutting-edge research are offered by many universities and educational institutes worldwide. Studying abroad can give you access to modern facilities, famous teachers, and specialised programmes that might not be offered in your native country. Studying abroad can be a life-changing experience that provides intellectual, cultural, and personal growth. It gives you the chance to extend your horizons, learn useful skills, and make connections that will last a lifetime.
Q. How do I reduce the cost of studying abroad?
A. To reduce the cost of studying abroad, consider the following strategies:
- Choose Affordable Destinations: Research and select countries or cities with lower costs of living and tuition fees.
- Budget Wisely: By considering the cost of living, programme fees, and anticipated expenses, create a realistic budget. Think about things like lodging, meals, transportation, and recreational activities. Set spending priorities and seek ways to cut costs, like preparing meals at home or taking the bus.
- Scholarships and Grants: By considering the cost of living, programme fees, and anticipated expenses, create a realistic budget. Think about things like lodging, meals, transportation, and recreational activities. Set spending priorities and seek ways to cut costs, like preparing meals at home or taking the bus.
- Part-time Work: If permitted by your visa requirements, look into part-time employment alternatives while studying overseas. Part-time employment might help with some living expenses while also gaining useful professional experience.
- Financial Planning: Make a budget and save money in advance for your study abroad trip. Reduce wasteful spending, establish a savings target, and look into funding options like crowdsourcing or sponsorships.
Q. What is a secured education loan?
A. In order to qualify for a secured education loan, the borrower must pledge collateral as security for the loan. An asset, such as real estate or other valuable belongings, may serve as the collateral. By putting up collateral, the borrower lowers the risk for the lender, which could lead to better loan terms like longer repayment terms or cheaper interest rates. In the event that the borrower defaults on the loan, the lender has the right to seize and sell the collateral in order to recoup the unpaid balance.
Q. What are the benefits of taking an education loan?
A. Here are some of the benefits of taking an education loan:
- Technical benefits: These include section 80E tax benefits, long-term moratorium, flexible payback options, etc.
- Other benefits: Tuition, living costs, textbooks, and other educational costs are all covered by education loans. Without immediate financial strains, they can assist students in pursuing their selected courses and degrees. By taking out an education loan, students can become financially independent and assume responsibility for their own educational costs.
To achieve a positive borrowing experience, it is advised to carefully investigate loan possibilities, comprehend the terms and conditions, and create a repayment strategy.
Q. What are the various criteria for deciding the value of collateral for an education loan?
A. The value of collateral for an education loan can vary depending on several criteria. Here are some factors that lenders may consider when determining the value of collateral:
- Type of Collateral: Collateral can take many different forms, including residential real estate, non-agricultural land, fixed deposits, commercial real estate, or other valuable assets. The market value of the collateral and the lender's evaluation of its liquidity and stability will determine how valuable it is.
- Loan Amount: The loan amount requested could have an impact on the collateral's value. The loan-to-value ratio, which compares the loan amount to the value of the collateral, is a factor that lenders frequently take into account. The type of collateral and the lending institution's rules can influence the allowable loan-to-value ratio.
- Repayment Capacity: The repayment ability and creditworthiness of the borrower are key factors in evaluating the value of collateral. In order to determine whether a borrower will be able to repay the loan, lenders consider things including their income, employment history, and credit history.
Keep in mind that a variety of criteria, such as the type of collateral, loan amount, collateral evaluation, repayment capacity, and lender policies, influence the value of collateral for an education loan.
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