Studying overseas has long been seen as a doorway to a better future because it gives students the knowledge and perspective they need to succeed in an extremely competitive and dynamic global workforce. But applying to and eventually being accepted into one’s ideal university can be a time-consuming and difficult process, particularly when it comes to finding the money for the program.
Given that education loans have several advantages for both students and their families, many people view them as a reliable and secure method of financing their education. Over time, there has also been simplification in the education loan application process. The online application, quick processing, doorstep service, and in-depth professional counselling have made education loans for studying abroad hassle-free and practical. Collateral is required by banks and other financial organisations in order to reduce risk. Collateral is used to cover the cost of education loans in the event that a student defaults on them.
A prominent Indian news outlet has reported on a consulting firm study indicating that by 2024, there may be 1.8 million Indian students aiming to study overseas. Furthermore, non-English speaking countries like Norway, Italy, Japan, France, Sweden, and so forth are a possibility for 42% of students planning to study abroad.
What is Collateral?
Students who are looking for student loans often get confused when they hear the term “collateral education loan.” They don’t know what it is or what kind of protection they can offer, which is why. An asset is pledged as collateral for a student loan. It could be an intangible asset like a fixed deposit or a tangible asset like a house.
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Types of security are acceptable by lenders
Banks typically accept two types of collateral as security for loans intended for higher education abroad. It is always better to get a government bank collateral education loan if you have property to pledge. A home, flat, bungalow, non-agricultural land, fixed deposit, life insurance, etc. can all be used as collateral security.
Accepted collateral by different lenders
In general, secured education loans typically accept collateral in three primary forms:
1. Immovable property:
Lenders are willing to accept non-agricultural land with clearly defined borders, as well as immovable properties such as standalone homes, apartments, or plots. Agricultural land is generally not accepted as collateral. The evaluation of the property is conducted by a bank-appointed appraiser. Collateral must be pledged with all original property documents, including the registered sale deed, authorized plan or map, and any related chain documents.
2. Liquid assets:
Collateral can also take the form of liquid assets, including Fixed Deposits (FDs), Life Insurance Policies (LICs), and Government Bonds. These assets can be quickly converted into cash and are valued at their exact worth. Borrowers may choose to maintain their FDs with the same institution from which they are borrowing or create a new FD for the loan purpose. For LICs, the policy should be a maturing one with a defined maturity date.
3. Third-party collateral:
In cases where the borrower lacks personal collateral, they may pledge third-party collateral held by friends or family members. The original documentation for this collateral must also be provided.
Lenders require collateral as a risk mitigation strategy, and the type and value of collateral depend on the individual student’s profile and financial needs. It’s worth noting that some Non-Banking Financial Companies (NBFCs) offer unsecured loans of up to Rs. 20 lakh for meritorious students, eliminating the need for collateral. When considering education loans, carefully assess your options and choose a lender that provides transparency and cost-effective solutions based on your unique circumstances.
Benefits of taking an collateral based loans
Collateral-based loans offer several advantages for both borrowers and lenders. Here are some key benefits associated with taking collateral-based loans:
1. Lower interest rates:
One of the primary advantages of collateral-based loans is that they often come with lower interest rates compared to unsecured loans. Lenders view collateral as a form of security, reducing the risk associated with the loan. As a result, they are more willing to offer lower interest rates to borrowers who provide valuable assets as collateral.
2. Access to higher loan amounts:
Collateral allows borrowers to access higher loan amounts than they might qualify for with unsecured loans. The value of the collateral determines the loan limit, and this increased borrowing capacity can be beneficial for significant financial needs, such as purchasing a home or funding a business.
3. Improved approval odds:
Collateral provides lenders with a tangible form of security, making the loan less risky for them. This often leads to improved approval odds for borrowers, even those with less-than-perfect credit histories. The presence of collateral can mitigate concerns about the borrower’s ability to repay, making lenders more willing to extend credit.
4. Flexible repayment terms:
Collateral-based loans may come with more flexible repayment terms. Lenders may offer longer repayment periods, allowing borrowers to spread out their payments over time. This flexibility can make it easier for borrowers to manage their finances and meet their repayment obligations.
5. Tax benefits:
In some cases, the interest paid on collateral-based loans, such as home mortgages, may be tax-deductible. This can result in potential tax benefits for borrowers, providing additional financial incentives for using collateral to secure a loan.
6. Establishing good credit:
For borrowers looking to establish or rebuild their credit history, collateral-based loans can be a strategic option. Successfully repaying a secured loan demonstrates financial responsibility and can positively impact the borrower’s credit score over time.
While collateral-based loans offer numerous benefits, it’s essential for borrowers to carefully consider the risks associated with using valuable assets as security. Defaulting on a collateral-based loan can result in the loss of the pledged assets. Therefore, individuals should thoroughly assess their ability to meet repayment obligations before opting for a collateral-based loan.