If you want to study abroad but are concerned about the costs, don't worry; education loans have your back. If you are going through a financial crunch but still have the urge to study at a prestigious university in an international country, education loans are one way to help with the costs of studying abroad. Students who apply for education loans abroad are familiar with types of education loans such as collateral and non-collateral loans.
In India, study abroad loans are available in two different categories; below are brief details about each.
This article is a complete guide to collateral loans; it highlights all the relevant aspects and features of collateral loans. In the past, thinking about studying abroad used to cause stress due to the financial requirements, as self-financing your education abroad often requires a significant amount of money. However, since the days when SBI started sanctioning education loans abroad, this situation has changed significantly. Now, thinking can easily be turned into diligent action to turn your dream of studying abroad into a reality.
Private lenders, including private banks and NBFCs, have made an important contribution by providing large amounts of education loans abroad to students. Anyone planning to take out an unsecured loan can consider these private lenders. However, most public banks deal with collateral-based study abroad loan cases.
To initiate the collateral loan process, the first step a borrower must take is to clarify their knowledge about the eligible collateral that the bank accepts as security against the loan amount. Education Loan Guru can guide students throughout their journey.
Now, a question arises in everyone’s mind: why do banks require collateral? Let's find out the reason:
Collateral is required by the bank to recover its dues in case the borrower fails to repay the education loan. Education loans have become non-performing assets (NPAs) for banks and lenders. Student loan debt recovery has been slowed to some extent. According to an Economic Times report, a high rate of 8% has been observed as NPAs in foreign education loans, making banks cautious about lending the loans now, and they have adopted strict guidelines for applicants seeking education loans. High default cases, rated at nearly 8%, have made the banks cautious about providing student loans for study abroad and have set high eligibility criteria for students.
In India, about 90% of education loans have been disbursed by PSBs, and default cases have negatively affected the portfolios of student loans for study abroad. To reduce default cases and decrease the number of NPAs in education loans, banks have adopted strict procedures for lending loan amounts. The steep rise in the number of non-performing assets (NPAs) in education loans could hamper the credit limits of the banks. Most banks offer a scheme for education loans as per the Indian Banks' Association's (IBA) model education loan scheme.
This model is applicable to students pursuing higher studies in India and abroad. According to this model loan scheme, education loans up to Rs 4 lakh do not require any collateral from the borrower. Education loans up to Rs 7.5 lakh can be obtained with collateral in the form of a suitable third-party guarantee, and education loans above Rs 7.5 lakh require tangible collateral. In all the cases mentioned above, the co-obligation of parents is necessary.
The actual value of collateral provided by banks in education loans cannot be predicted or determined definitively, as it varies from bank to bank and depends on their education loan scheme.
However, if you have collateral as security, it is advisable to approach public sector banks for student loans for study abroad, according to the education loan guru. For the borrower's reference, we have included a brief comparison of loan sanctions based on collateral so that they can get an idea of the estimated value of the loan from the bank.
Leading public-sector banks like SBI generally grant 70% to 80% of the total loan amount based on the collateral. The bank evaluates all the documents related to the provided collateral and sanctions the loan amount based on its value. Taking an education loan from SBI has the benefit of offering favourable repayment terms and a moratorium period during which the borrower can arrange ways to repay the debt.
Bank of Baroda, for example, offers to sanction 100% of the loan amount for studying abroad. If your collateral is valued at around 80 lakh rupees, SBI will lend you 70% of that amount, which is 56 lakh rupees. On the other hand, the Bank of Baroda will lend the borrower the full value of the collateral, which is 80 lakh rupees. However, this is entirely dependent on the bank."
There are three types of collateral that banks accept for education loans:
1. Immovable Property: Banks do not accept agricultural land as collateral. However, independent residential properties such as houses, flats, or plots with clearly defined boundaries are acceptable. The bank will appoint its own property appraiser to assess the market value of your property and verify the documents. To avoid rejection, you must provide all correct and original documents related to the collateral. The bank will require the registered sale deed, an approved plan or map of the plot and house, and a list of other necessary documents.
2. Third-Party Collateral: If you do not have any collateral of your own, you can use the property of your extended family members. The property must belong to your relatives or friends, and they should possess all the required documents as proof of ownership. The bank will consider this property acceptable collateral.
3. Liquid Assets: In addition to flats and houses, banks also accept liquid assets such as fixed deposits, shares, and LIC bonds as collateral. These assets are considered at their actual value, making them easy to convert into cash if needed. When pledging fixed deposits as collateral, they must be in the same bank from which you are applying for the education loan. For LIC policies, they should be mature policies with a maturity date to be used as collateral. As for fixed deposits, you can either use an existing one or create a new one to be pledged as collateral."
To be eligible for collateral-based loans and access their benefits, applicants must meet certain criteria. It's important to note that eligibility requirements can vary among lenders, with public banks having stricter guidelines compared to NBFCs. Public-sector banks thoroughly verify all documents provided.
Outlined below are general eligibility guidelines followed by most banks:
1. The applicant must be an Indian citizen. NRIs holding an Indian passport can obtain loans from Indian public banks.
2. The property to be pledged as collateral must have all the correct and original documents.
3. Academic scores are taken into consideration, with public banks typically favouring students with a strong academic record.
4. The CIBIL score is of utmost importance. A good CIBIL score increases the chances of loan approval from a bank, while candidates with a poor CIBIL score (less than 650) may face difficulties. A good CIBIL score is mandatory to demonstrate creditworthiness and repayment capacity to the bank.
Now, let's explore some essential benefits that applicants can avail themselves of by taking collateral-based education loans
1. Collateral loans allow students to obtain a large loan amount, with banks offering loan limits of up to Rs. 1.5 crore. These loans come with comparatively lower interest rates than those offered by private banks and NBFCs.
2. Applicants can apply for a collateral loan without requiring a financial co-applicant. Parental income proof is not necessary in such cases.
3. Collateral-based loans provide extra time through a moratorium period and a longer loan repayment duration. Repayment is usually not required during the study period.
4. Section 80 E of the Income Tax Act provides tax benefits, allowing payments made towards education loans, including interest payments, to be classified as income tax deductions. Both applicants and co-applicants can avail of these tax benefits."
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Name of the Bank |
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State Bank of India |
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Punjab National Bank |
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Applying early for your education loan, especially if you are planning to take it from a public bank, can be beneficial. This is because the verification process and evaluation procedure followed by public banks can be time-consuming. Public banks adhere to strict verification and evaluation procedures, particularly when evaluating the applicant's provided collateral.
By Education Loan Guru
