Collateral for Education Loan: Everything You Need to Know

Benefits Offered by Banks for Education Loan

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.

Types of Education Loan

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 for Education Loan?

Many students get confused when they hear the term "collateral education loan". Very few of them understand what it means or what assets they can use. Simply understand that, collateral is an asset you pledge against your education loan. This could be a physical asset like a house or a financial one such as a Fixed Deposit.

Education loan providers like banks and NBFCs require collateral to reduce their risk. If any student who took the education loan is unable to repay it, the collateral can be used to cover the outstanding amount. Acceptable forms of collateral include property (house, flat, bungalow, non-agricultural land) or other assets like Fixed Deposits or life insurance policies.

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.

Here are point-wise difference between secured and unsecured education loans

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

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.

Related Articles: