Collateral for Education Loan: Everything You Need to Know
The primary objective of an education loan is to extend financial support to students who wish to pursue education in India and abroad. With the cost of quality education rising every year, it is becoming highly difficult and unaffordable for deserving students to study at premier institutes. After scholarships, education loans are the most preferred way of funding education.
Education loans are a reliable and secure way to fund education and are being preferred by many since they have multiple advantages for the student as well as their families. The process of education loans, too, has been simplified over the years. Online application, quick processing time, doorstep service, and complete guidance from experts have made education loans hassle-free and convenient.
In India, many banks and financial institutions provide education loans to students and hence, students have the freedom to compare and analyse various products before selecting one. The features and services differ among various banks but most provide the following advantages to students and their families:
- Easy online application
- Tax benefits under Section 80E
- Flexible repayment terms
- Long moratorium period
- No margin money up to Rs 4 Lakh
However, with growing competition, it is important to gather complete information related to education loans to be able to make an informed and wise decision. The financial terms can be a little confusing but their understanding is necessary for you to choose an education loan that best suits your financial requirements.
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, 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.
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?
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, no collateral is required. 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 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. 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 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 in 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.
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.
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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, 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!