Embarking on higher education abroad is a transformative journey, yet it frequently brings a substantial financial challenge. To overcome the disparity between your aspirations and financial means, opting for education loans becomes a practical solution. When aiming for considerable loan sums or favorable conditions, using collateral as a form of security can be a wise decision.
What is an education loan with collateral?
Collateral security involves the asset or property that a borrower commits to a lender as a means of assurance for an education loan. It offers the lender a feeling of assurance, mitigating the risks linked with lending a substantial amount. Should there be a default on the loan, the lender is entitled to take possession and sell the collateral to recoup the remaining balance.
Types of Collateral Accepted
Lenders in secured education loans typically accept three main types of collateral:
Tangible Assets:
- This category includes immovable properties like independent houses, flats, plots, or non-agricultural land with clearly defined boundaries. A designated evaluator appointed by the bank assesses the property.
Intangible Assets:
- These encompass assets such as Fixed Deposits (FD), Life Insurance Policies (LIC), or government bonds. These assets are valued at their exact monetary worth as they can be readily converted into cash. Important considerations for borrowers include ensuring the FD is held with the same bank providing the loan, and the loan can be secured against an existing FD or a new FD created for this purpose. The FD holder continues to accrue interest as usual. For LIC, it should be a maturing policy with a fixed maturity date to be eligible as collateral.
Third-party Collateral:
In instances where a borrower lacks personal collateral, they have the option to pledge third-party collateral belonging to a friend or relative. However, the original documents of the collateral must be submitted in this scenario as well.
How much collateral is needed for an education loan?
Now answering one important question – How much collateral is needed for an education loan?
There is no definitive answer for it as the amount of collateral required differs from lender to lender and from scheme to scheme.
Here’s a concise overview of selected leading lenders for a quick comparison:
- SBI (Public Sector Bank): Requires collateral equivalent to 70% of the loan amount. Education expenses covered up to 90%, with students responsible for arranging the remaining 10%.
- Bank of Baroda (Public Sector Bank): Sanctions nearly 100% of the collateral value as the loan amount. It can cover 100% of expenses for specific colleges.
- Axis Bank (Private Bank): Sanctions 65-70% of the collateral value as the loan amount. Typically covers 85% of total expenses, requiring students to arrange for the remaining 15%.
It’s important to note that the collateral value is evaluated by authorized property assessors, adhering to government regulations, and is generally slightly lower than the market value. Public sector banks like SBI and Bank of Baroda present more favorable terms in terms of collateral value and education expense coverage compared to Axis Bank, a private lender.
Features of Education Loan with Collateral
For an education loan with collateral, either tangible or intangible security is necessary. Secured education loans provide the advantage of higher loan amounts, reaching up to INR 1.5 Cr, coupled with lower interest rates starting from 8.85%. Typically, loans secured with collateral attract lower interest rates compared to those without. Utilize GyanDhan’s Education Loan Interest and EMI calculator to estimate EMIs and total interest.
Proof of parental income is not obligatory, though a robust income can be advantageous. Education loans with collateral often offer an extended repayment duration. Certain banks, such as SBI or BOB, may allow no repayment during the study period, with interest accumulating. Secured loans from banks may qualify for tax benefits under Section 80E.
Collateral security for education loans can offer numerous benefits, including access to higher loan amounts, lower interest rates, extended repayment tenures, increased chances of loan approval, and potential credit-building opportunities. However, it’s important to carefully assess your financial situation, consider the value of the collateral, and review the terms and conditions of the loan before proceeding. Comparing loan products and lenders can be difficult and confusing. If you too are in a dilemma, you can request a call back to know your best options after a proper evaluation of your profile and loan eligibility. By doing so, you can make an informed decision that supports your educational aspirations while safeguarding your financial well-being.