Collateral for Education Loan: Everything You Need to Know

An education loan's main goal is to provide financial assistance to students who want to pursue higher education both in India and overseas. For worthy students, attending top universities is increasingly difficult and expensive as the price of a decent education continues to rise. After scholarships, education loans are the most preferred way of funding education.

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.

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 Assests - 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 requirement. 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 loan through Shiksha.

Related Articles:

• Education Loan Vs. Self Funding to Study Abroad
• How to choose your bank for Education Loan to Study Abroad
• The A to Z of Study Abroad Loans: All Terms and Their Definitions
• Step by Step Guide to Education Loans
• Everything You Need to Know About Education Loan

About the Author

HDFC Credila, an HDFC Ltd. Company, is India's First Dedicated Education Loan Company. With a specialized focus, 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!