Margin money in an education loan

Students coming from different backgrounds apply for education loans abroad because they have a dream to study abroad. Student loans to study abroad have become a popular financial tool for students who wish to pursue their higher education at foreign universities. While applying for a study abroad loan, you might have come across many confusing terminologies. ‘Margin Money’ is one such term that often confuses people.

Margin money is a specified amount of money that the borrower is required to pay for their expenses, which the bank has denied paying. Many lenders claim to provide 100% of the loan amount, covering all the expenditures, including travel, living, and accommodation, along with university fees. However, it is not always mandatory that your education loan amount cover all the expenses. This is where margin money comes into play.

For example, if your lender charges a 5% margin on the total amount of the education loan, then the loan will only cover 95% of the total expenditures, and the rest 5% will be paid from your own pocket.

Importance of Margin Money in Education Loans

This is a general question asked by many aspirants: why is margin money important in education loans? Let’s check out the answer for the same:

• Reduced risks for lenders: It is not news that banks have to face failures in loan repayments and excessive dues that are not paid on time by the borrower. The same applies to education loans abroad. To reduce the risk of non-repayments, they have started charging margin money on education loans as well.
• Helpful in increasing the amount of the loan: By paying the margin money to the banks, a trust relationship has been established, and banks will be able to lend you the loan amount without any hesitation. Margin money helps in building trust and is thus helpful for the borrower to get a large part of the loan amount covered by the bank.
• Better Interest Rates: Borrowers who are able to pay a higher margin may be eligible for better interest rates. This is because the higher margin money reduces the risk for the lender and allows them to offer lower interest rates to the borrower. Public banks usually charge some margin money from the total amount of the loan to give the borrower a stake in the responsibility. This makes the borrower responsible for paying back the loan on time. If an individual is able to get the loan from a public bank, the interest rates will be an added bonus because they are lower than those of NBFCs and private banks.
• Improved Credit Score: On-time repayment of loans has been a proven way to improve your credit score. If you have a good credit history of repayments and your CIBIL score varies between 670 and 739, then you will be considered for the loan by the bank without any problem. It will also help you in the easy process of repaying your loan because of your good credit worthiness and ability to repay it to the bank.

How Does Margin Money Work in Education Loans?

The process of using margin money for education loans works as follows:

Loan Application: After successfully meeting the eligibility criteria for an education loan, you can fill out the loan application form to initiate the loan process. This is the first step to applying for an education loan. This involves filling out an application form and providing all the necessary documents, such as proof of identity, proof of income, and proof of education expenses.

Loan Assessment: Once the loan application is submitted, the lender will assess the loan application to determine the loan amount that can be approved.

Margin Money Requirement: If the loan amount is approved, the lender will specify the margin money requirement. The margin money requirement can range from 5% to 15% of the loan amount. Banks and NBFCs have their own criteria for charging margin money on education loans to study abroad.

Payment of Margin Money: The borrower must pay the margin money before the loan amount is disbursed. The margin money can be paid in cash, through a fixed deposit, or through other approved securities. You have to pay the margin money, i.e., the remaining amount that is not covered by the bank; for example, if you require 30 lakh INR of the total loan amount and the bank has agreed to disburse 90% of the loan amount, then the remaining 10% will be paid by the borrower for their expenses.

Loan Disbursement: Once the margin money is shown by the applicant, the loan amount will be disbursed to the borrower. The loan amount can be used to pay for education expenses such as tuition fees, books, and living expenses. This is the final stage of the entire loan process.

What is the process of calculating margin money?

The formula for calculating the margin amount in percentage is: 1-(sanctioned loan amount/overall expenses) * 100

Let’s understand this with the help of an example.

If you need INR 50 lakhs as a total expenditure on your abroad education and the bank is sanctioning the loan at a 16% margin rate, then the borrower will have to pay 8 lakh INR to the bank as margin money, and the remaining 84% amount will be transferred to the bank afterwards.

In simple words, the margin money is Total Loan Amount minus (minus) the amount granted by the bank = Margin Money (remaining to be deposited by the borrower).

However, having a lower percentage of margin money is beneficial for the borrower since most of the loan is covered by the bank.

What is a 0% loan margin?

Many private lenders provide education loans at 0% margin, specifically in the case of an unsecured loan. They have their own criteria for lending the loan to the borrower, but in the end, it totally depends on the lender offering loans to a student. Thus, the grant of 100% of the loan amount, based on any deduction criteria, is totally the call of the bank.

If you still face any difficulty with a foreign education loan, then contact the Education Loan Guru.