What is collateral in education loan?

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When applying for an education loan, many Indian banks typically require collateral security, often referred to as a ‘secured education loan.’ In such cases, collateral, whether movable or immovable, is provided to secure the loan. Examples of what is collateral in education loan include movable assets like fixed deposits and immovable assets like non-agricultural properties.

An education loan is a financial aid option for students pursuing domestic or international education, covering expenses such as tuition fees, living costs, books, and related expenditures. These loans can be obtained from banks and government organizations and come with an associated interest rate, representing the cost of borrowing.

Characteristics of What is collateral in education loan

• An education loan with collateral requires some sort of security, either tangible or intangible.
• Higher loan amounts, up to INR 1.5 Cr, are available with secured education loans at lower interest rates (beginning at 8.85%).
• Generally speaking, loans with collateral have lower interest rates than those without.
• While it’s not necessary to provide proof of parental income, having a high income can be advantageous.
• Collateralized education loans come with longer repayment terms.
• Certain banks, such as SBI and BoB, do not provide repayment during the study period; instead, interest is accumulated.
• Bank secured loans may be eligible for Section 80E tax benefits.

In addition to connecting applicants with lending bank branch managers or relationship officers, GyanDhan offers document pick-up services.

The necessity for collateral in education loans is rooted in the need to mitigate the risk involved in loan repayment. Since not all students secure immediate employment after graduation, banks lack a guarantee of future income and financial stability. Collateral serves as a security measure in such situations.

Various forms of collateral are acceptable for obtaining a student loan, falling into three primary categories:

1. Immovable Assets: Immovable assets include real estate such as land, houses, or flats. It’s important to note that lenders typically do not accept farmland or land under the jurisdiction of local Gram Panchayats as collateral. However, non-farm open properties with clearly defined boundaries can be utilized to secure a student loan.

2. Intangible Assets: Intangible assets consist of liquid investments like fixed deposits, mutual funds, ULIPs (Unit Linked Insurance Plans), life insurance plans, and government bonds. While the bank retains these liquid securities, the holder of the fixed deposit will continue to earn interest on the intangible assets. Both existing and new fixed deposits can serve as collateral for student loans.

3. Third-party Secured Education Loan: Uncommonly, lenders may accept collateral in the form of immovable property owned by a third party. This type of arrangement is termed a “third-party secured education loan” and typically involves the immovable property of a relative or friend.

These three categories provide borrowers with flexibility in choosing collateral based on the type of assets they possess or have access to. Immovable assets, intangible assets, and third-party collateral options offer various avenues for securing a student loan.

Various types of collateral can be utilized for education loans, including immovable assets like real estate and intangible properties like mutual funds and government bonds. Third-party secured education loans involve a third party providing collateral to assure the lender of repayment if the student defaults.

The amount of collateral needed for a student loan to study overseas is not mandatory, but the value is determined by the lender’s evaluators. Unsecured loans are available for amounts up to INR 7.5 lakhs, but for higher amounts, collateral becomes a requirement. Banks are more inclined to approve secured loans due to the added security in case of default, resulting in lower interest rates and more favorable terms.

Immovable property is a commonly pledged form of collateral for student loans, although liquid securities like fixed deposits, government securities, and mutual funds are also accepted. Liquid securities are preferred due to their quick conversion to cash, expediting the lending process. However, the evaluation process for immovable properties can be time-consuming.

Liquid securities, as a form of collateral for student loans, see less frequent use compared to immovable property. This is largely because the conventional perception of what is collateral in education loan often revolves around houses or land, and bank personnel may not routinely elaborate on alternative options.

Nevertheless, it’s essential to note that liquid securities, such as government securities, present advantages that borrowers might find beneficial. Unlike immovable properties, which involve intricate legal and valuation processes, liquid securities can be swiftly converted into cash. This streamlined process reduces the time-consuming legalities and valuation procedures associated with immovable properties, resulting in a quicker lending process.

Here are specific types of liquid securities commonly accepted as collateral:

• Government Securities: Bonds issued by Public Sector Undertakings (PSUs), National Savings Certificates (NSCs), and RBI Relief Bonds are acknowledged as collateral security. Borrowers can secure loans up to the total face value of the bond.

• Mutual Funds: While mutual funds can serve as collateral for education loans for studies abroad, only a limited number of banks accept them. It’s worth noting that the evaluation process for mutual funds can be both arduous and time-consuming. Banks typically consider approximately 50% of the current market value when determining the loan amount. In some cases, it may be more advisable for borrowers to sell their shares and establish a fixed deposit account with the proceeds.

• Fixed Deposits: Fixed deposits (FDs) emerge as a commonly pledged form of collateral among liquid securities. When used as collateral for student loans, lenders assess the principal value of FDs, not their maturity value. Fixed deposits often qualify for loans ranging from 90% to 100% of their value from lenders.

While immovable property remains a popular choice for collateral, liquid securities like government bonds, mutual funds, and fixed deposits offer expedited processes and unique advantages for borrowers seeking student loans. In summary, collateral serves as a risk mitigation strategy for education loans, providing security for lenders. The type and value of collateral vary, offering flexibility for borrowers to choose based on availability and lender requirements.