A Student Guide for Collateral Education Loan: Complete Details & Analysis
A collateral education loan is also called a secured loan because borrowers have to lend some type of collateral in order to get financial assistance from the bank or other lender. The collateral may be movable or immovable and serves as a sense of security for the lender. It is offered at comparatively lower interest rates, generally between 8%-11%, depending on the loan amount, scheme, lender, and student application.
In this blog, we have discussed the features of collateral education loans, including their types, eligibility, application process, tips for managing collateral loans, and more.
- What is a Collateral Education Loan?
- Features of Collateral Education Loan
- Types of Collateral Education Loan
- Key Terms Related to Collateral Education Loan
- Non-Collateral vs Collateral Education Loans: Key Differences
- Eligible Assets for Collateral Education Loans
- Responsibility of a Third-Party Guarantor in
- Maximum Loan Amount Against Collateral
- List of Expenses Covered in Collateral Education Loan
- Eligibility Criteria for an Education Loan with Collateral
- Documents Required for Collateral Education Loan
- Application Process for Collateral Education Loan
- Tips for Managing Collateral Education Loan
- Conclusion
- FAQs
What is a Collateral Education Loan?
An education loan with collateral, sometimes called a secured loan, is the type of education loan lent to students when they pledge their movable or immovable properties as collateral or assets to a bank or financial institution. It is also known as a secured loan because the bank or financial institution has the right to seize and sell the asset to recover the outstanding balance if the borrower does not make the loan amount. It provides lenders with a sense of security and assurance when they are granting large sums of money to borrowers.
Features of Collateral Education Loan
An education loan with collateral involves a high risk of losing assets or valuable property if the borrower is unable to pay the loan amount. The various forms of asset or collateral can be real estate property, vehicles, houses, flats, agricultural land, jewellery, deposits, etc., with a substantial market value. While applying for a secured education loan, the lender assesses and evaluates the market value of the property or asset before granting a percentage of that value as the loan amount. Let us discuss some of the significant features of an education loan with collateral.
Lower Interest Rate: Banks or financial institutions provide education loans at relatively lower interest rates because these are considered secured loans as they reduce the lender’s risk. Depending on the lender, it varies between 8.25-11.25% per annum.
Higher Loan Amount: An education loan with collateral involves the lending valuable asset or property that has a large market value; the borrower is liable to get a higher loan amount since it is determined based on the value of the collateral. It varies between INR 7 Lakhs-1 Crore, depending on the lender and borrower’s necessity.
Longer Period of Repayment: It is offered with a longer repayment period depending on the loan type and amount, reducing EMIs.
Delayed Approval: Since an education loan with collateral is a secured loan, the lender takes a very long time to process and approve its application because it involves the assessment and evaluation of the assets, which usually takes around 15-30 days.
Improvement in Credit Score: Successfully repaying the education loan leads to a positive impact on credit score or CIBIL score, which is taken into consideration by lender when one is planning to take a loan in the future.
Types of Collateral Education Loan
There are generally three types of education loans with collateral based on the movability of the asset, they are:
Tangible Collateral Education Loan
A tangible collateral education loan is taken by lending the immovable property or asset such as a house, flat, land, agricultural land, plot, etc., with a clearly defined boundary. The owner of the tangible collateral security should be either an applicant or co-applicant in the education loan process.
Intangible Collateral Education Loan
Intangible collateral education loan requires students to lend movable assets such as fixed deposits (FD), insurance policies, government bonds, gold etc. These are often known as intangible collateral security.
The borrower should keep the following points in mind while opting for an intangible collateral education loan:
- The fixed deposits (FD) should be in the same bank from where the loan is to be taken.
- If there is no FD, then a new fixed deposit can be created for this purpose.
- Taking an education loan on intangible collateral security such as Fixed deposits and insurance policy will not hamper its benefits.
- The insurance policy should reach its maturity period.
Third-Party Collateral
In some cases, when the borrower has no intangible and tangible collateral security to lend, they can pledge the collaterals of a third party, such as a friend or relative.
Also read – Ways to Fund your Overseas Education
Key Terms Related to Collateral Education Loan
Here is a detailed description of some of the important key terminologies related to secured education loans:
- Moratorium Period: The duration for which the borrower is not required to repay the loan, which starts after the completion of the academic course. Its duration ranges from 6 months to 1 year.
- Collateral: It is an asset or property that the borrower or student pledges to the lender as security against the loan amount. In case of default or failure to repay the loan, the lender has the authority to seize and sell it to recover the loan amount.
- Co-applicant/Cosigner: It is an individual who jointly applies for a collateral education loan with the main applicant (student). The co-applicant could be a parent or guardian.
- Interest Rate: The percentage charge is imposed on the loan amount that the student has borrowed. Loan repayment EMIs are based on the principal amount, interest rate, and loan tenure or duration.
- Loan Tenure: It is the duration the borrower must repay the loan amount, typically a few years after the moratorium period ends. It depends on the loan amount, interest rate, and borrower’s financial situation.
- Margin Money: It is the portion of the total educational expenses the borrower (student) must bear. The bank or other financial institution covers the remaining amount through the education loan. It is also known as a down contribution.
Non-Collateral vs Collateral Education Loans: Key Differences
Below, we have tabulated the main differences between the collateral and non-collateral education loan:
| Features | Education Loans with Collateral | Education Loans without Collateral |
|---|---|---|
| Collateral or Security | Movable or immovable security is required to be pledged at the bank | No security or collateral is required to pledge at the bank |
| Loan Amount | It ranges from INR 20 Lakhs-1 Crore | It ranges from 4 Lakhs-70 Lakhs, depending on the bank |
| Interest Rates | Lower interest rates, e.g. 8.25%-11.25% | Higher Interest rates due to risk, e.g. 10.00%-14.00% |
| Requirement of Co-Applicant | Co-applicant is not required | Co-applicant is required in most cases |
| Processing Time | Takes about 20-30 days due to the assessment of collaterals | Takes less time in comparison to a collateral education loan |
| Advantages | Provide large loan amount Improves CIBIL score if repayment is done on time Flexible repayment options in small EMIs. | Students do not have to worry about security Covers a wide range of colleges and universities across the world Co-applicant is there to help the student in case of failure to repay the loan amount. |
Eligible Assets for Collateral Education Loans
When applying for the education loan with collateral, the following assets can be pledged as follows:
- Motor Vehicles
- Valuable metals and jewellery such as gold coins, gold bars, silver coins, valuable gemstones, antique fine arts, etc.
- Real Estate such as a home, plot, flat, agricultural land, etc.
- Financial Investments such as fixed deposits, recurring deposits, insurance, government bonds, stocks, mutual funds, sovereign gold bonds, etc.
Responsibility of a Third-Party Guarantor in
As described above, in some cases, when the borrower does not have sufficient intangible and tangible collateral security to lend, they can pledge the collateral asset of some third party, such as a friend or relative, to take an education loan. Usually, the lender asks for a third party when the loan amount is higher than the total value of the collateral pledged by the borrower. The responsibility of the guarantor is to assure the lender that if the borrower is unable to repay the loan amount, then they can do so. A third-party guarantor is also a witness that authenticates the credibility of the borrower. Mostly, a close family member or friend can become a third-party guarantor.
Maximum Loan Amount Against Collateral
An education loan with collateral allows students to avail the loan amount of upto 1 crore, depending on their needs and financial status. Since the secured education loan is a secured loan, students can explore a variety of offers and avail best-suited ones at lower interest rates. However, the sanctioned loan amount can vary on the basis of the estimated value of the collateral asset and the lender. Authorised Property evaluators evaluate the collateral value, which is generally lower than the market value.
| Bank | Interest Rate (per annum) | Maximum Loan Amount against Collateral |
|---|---|---|
| State Bank of India | 8.15%-11.75% | Upto 1.5 Crore INR |
| Punjab National Bank | 9.20% | Upto 1 Crore INR |
| Canara Bank | 9.25% | Upto 1 Crore INR |
| HDFC Bank | 9.50% | Upto 45 Lakhs INR |
| IDFC First Bank | 10.00% | Upto 80 Lakhs INR |
| Bank of India | 11.05%-11.85% | Upto 40 Lakhs INR |
| ICICI Bank | 9.85% | Upto 1 Crore INR |
| Bank of Baroda | 8.15% | Upto 1 Crore INR |
| Axis Bank | 13.70% | Upto 5 Crore INR |
| Auxilo | 10.00%-12.00% | Upto 80 Lakhs INR |
| MPower | 10.00%-12.00% | Upto 1 Crore INR |
| Incred | 10.50%-12.00% | Upto 90 Lakhs INR |
| Credenc | 11.25%-12.00% | Upto 2.5 Crore |
List of Expenses Covered in Collateral Education Loan
The following expenses are covered under the collateral education loan:
- Tuition Fees
- Accommodation rent
- Travel expenses
- Insurance premiums
- Cost of books and other stationary items
- Cost of laboratory equipment
- Library charges
- Cost of computer or laptop required for academic study, etc.
Eligibility Criteria for an Education Loan with Collateral
Below, we have mentioned the eligibility criteria required for Indian students to apply for a collateral education loan:
- The borrower/applicant must be an Indian citizen.
- The co-borrower/co-applicant must be an Indian citizen.
- The minimum age to apply for an education loan should be at least 16 years.
- The applicant’s previous academic record should be proven good.
- In case the applicant opts for a collateral loan, they must have relevant assets to offer (as listed in the bank’s requirement letter).
- Co-borrower(s) must have an account in any bank in India.
- The applicant must have completed their high school and intermediate study (10+2 level/diploma) in any government-recognized school.
- The applicant must present a letter of acceptance from a reputable overseas college/university.
- The applicant’s chosen course must be technical or professional and provide job aspects after the completion of studies.
Documents Required for Collateral Education Loan
Below, we have listed the required documents for applying for an education loan with collateral:
For Applicant (Student)
- Fully completed and signed loan application form
- Two passport-size photographs
- Photo ID card (Aadhar card/Voter ID card/Passport/PAN Card, etc.)
- Residence Proof (Passport/Voter ID card/Aadhar card)
- Previous academic documents (mark sheets, transcripts, and certificates)
- Certificate of participation or achievement in extra-curricular activities
- Language proficiency certificates (TOEFL/IELTS/Duolingo etc.)
- Standardised test certificates (college/university entrance tests such as SAT/ACT and GMAT/GRE)
- Proof of Admission (Admission letter or letter of acceptance from the foreign institute on its letterhead with address)
- College and course’s prospectus
- Statement of cost of study/schedule of expenses
For Co-Applicant
A co-applicant can be a student’s father, mother, brother, sister, spouse (husband/wife), grandparent, parents-in-law, or maternal/paternal uncle.
- Two passport-size photographs
- Photo ID card (Aadhar card/Voter ID card/Passport/PAN Card, etc.)
- Residence Proof (Passport/Voter ID card/Aadhar card)
- Last 6-8 months bank statement
- Income proof of co-applicant
In the case of Salaried Employees
- Latest 3 months’ salary slips or salary certificate on Employer’s Letterhead
- Last two year’s Form-16 from employer or last 2 year’s Income Tax Returns
In the case of Self-Employed
- Last 2 year’s Income Tax Returns
- Last 2 year’s certified financial statements or provisional financial statements duly certified by CA
- Proof of office (any one of the following: lease deed, utility bill, title deed, etc.)
Collateral Documents for an Education Loan – Immovable Property
The following collateral documents for an education loan should be made if a house/flat/agricultural land is pledging:
- Property title deed
- 7/12 extracts in case of land
- Registered sale agreement along with society share certificate
- Original registration receipt for the above agreement
- Allotment letters by Municipal Corporations/authorized government authorities Like MHADA, CIDCO, etc.
- The previous chain of sale deed establishing the title
- The latest maintenance bill, along with receipts issued by the builder/ society,
- Latest property tax bill, along with receipts,
- NOC for the mortgage from society/builder,
- Approved building plan
- Encumbrance certificates as on date, etc.
Application Process for Collateral Education Loan
The application process for the collateral education loan can be made at the following places:
- Bank branch
- Bank’s website
- Vidya Laxmi Portal
If a student wants to apply for a collateral education loan, they must visit their nearest bank branch with all the required documents, accompanied by co-applicant(s).
Below, we have provided the step-by-step details of the online application process for overseas education loans.
Application on the Bank’s Website
- Log on to the bank’s official website.
- Read all the terms and conditions related to the application process.
- Fill out the details of an applicant and co-applicants.
- Confirm and review the details.
- Click on ‘submit.’
Application on the Vidya Lakshmi Portal
Following is the step-by-step application process.
- Visit the official website of Vidya Lakshmi Portal
- Create an account on the portal
- An account activation link will be shared on the email address
- Click on the activation link
- After successful activation, login into the portal
- Now, to proceed with the application process, click on ‘loan application form.’
- Fill in all the mandatory fields, such as:
- Basic information
- Personal information
- Present banker details
- Course details
- Cost of finance details
Now, upload the required documents and click on ‘save.’
- The bank will start verifying the details filled out by the applicant.
- The applicant and co-applicant may be required to present themselves in the bank for verification purposes.
- The lender will take less than 30 days to process and approve the education loan.
Tips for Managing Collateral Education Loan
- Before proceeding with a loan application, read the terms and conditions carefully and thoroughly. Familiarise yourself with interest rates, repayment schedules, EMIs, consequences of not repaying the loan, etc.
- Only borrow the amount that is required enough to assist your educational expenses.
- Once after the end of the moratorium period, start repaying the loan according to schedule and keep it your priority.
- If you are facing financial difficulties, communicate with your lender in order to make an alternate way to repay the loan on time.
- Do not use collateral education loan amount on any other venture or purpose.
Conclusion
An education loan with collateral provides several advantages to Indian students who want to study abroad but are stuck with financial difficulties. Collateral education loans are offered at lower interest rates because these types of loans are secured loans that have been taken by pledging the security or asset to a bank or lender. Collateral education loan often comes with risks too. If the borrower does not make repayment, the collateral may get seized and sold by the lender to recover the loan amount.
However, with proper planning and strategy, such conditions can be avoided. With the help of a collateral education loan, students can borrow up to Rs. 1 Crore for their education and research purposes in foreign universities.
FAQs
What is the risk of collateral?
The greatest risk that includes lending collateral for education loans is that if the repayment is missed or delayed by a borrower, the bank or lending institution has the authority to use the collateral to recover the amount. It is always advisable to make loan repayment on time to prevent any possibility of defaulting on debt.
How much amount is granted when opting for a Collateral education loan?
Some public sector banks like SBI and PNB require 70-80% of the collateral value equivalent to the loan amount, whereas private sector banks like ICICI Bank and Bank of Baroda grant education loans that can cover 80-90% of the education expenses. The rest of the costs have to be arranged by the students.
Is there any possibility of taking an interest-free education loan?
In India, there is no possibility of getting an education loan without paying any interest rate. However, you can opt for a collateral education loan, which is provided at a lower interest rate and with various tax-saving benefits.
If you are an aspirant looking to study at your dream university, book an appointment with AdmitX today and start your applications early to avail yourself of all the benefits.
