Pursuing education abroad can be a daunting task, especially when it comes to funding. When exploring education loans, students inevitably encounter two key terms: Secured and Unsecured Education Loans. While many have a basic understanding of these concepts, there's more to consider beyond just the presence or absence of collateral. This blog delves into the details, including differences in loan amounts, interest rates, collateral value calculation and lender options. It aims to address common questions, such as:
- How is collateral value determined?
- Which lender is best for secured/unsecured loans?
- Which option is best for me?
- What are the eligibility criteria?
Secured Loans (also known as Collateral Education Loans) and Unsecured Loans (also referred to as Collateral-Free Education Loans). Secured Loans require students to provide a security guarantee, which can be a movable asset like fixed deposits, LIC policies or government bonds or an immovable asset like a flat, house, land or shop located in an urban area. On the other hand, Unsecured Loans do not require any security and are offered by private or nationalized banks based on other eligibility criteria. While choosing a loan option depends on individual convenience, this blog will focus on providing valuable insights for students considering Unsecured Education Loans, helping them make informed decisions.
Types of Accepted Collateral and How its Value is Calculated?
When it comes to securing an education loan, two primary types of collateral are accepted: immovable property (e.g., house, flat, non-agricultural land) and liquid security (e.g., fixed deposits, insurance policies, government bonds). To determine the value of the collateral, banks and financial institutions obtain a valuation report from a bank-approved civil engineer, which provides three key values:
1. Fair Market Value: The current market value of the asset if sold today.
2. Realizable Value: The expected future selling price, minus selling costs.
3. Distressed Value: The asset's value considering depreciation, loan repayment tenure, location, age, and future market conditions.
These three values determine the loan amount offered and the value of the collateral. The lender considers these factors to assess the collateral's worth and determine the loan amount.
Comparison of Lenders For Secured and Unsecured Education Loans
Public Sector Banks:
The education loans offered by public sector banks like SBI, BOB, and Canara primarily offer secured education loans. They also offer unsecured education loans of up to 7.5 Lakhs under the CGFSEL Scheme. Public banks offer the lowest interest rate compared to other lenders. Loan insurance is not mandatory in public banks but SBI offers a 0.5% discount on the overall interest rate on option for SBI Rinn Raksha.
Private Sector Banks:
Private sector banks like ICICI Bank, Axis Bank, and Karur Vysya Bank offer both secured and unsecured education loans. However, they charge comparatively higher interest rates than public banks. However, the loan amount offered for unsecured education loans is higher in the case of private sector banks. Loan insurance is mandatory in private banks.
NBFCs:
NBFCs in India are financial institutions like HDFC Credila, Avanse, Incred, and Auxilo that offer primarily unsecured education loans. They do not prefer secured education loans. NBFCs tend to charge the highest interest rates compared to the rest of the lenders. Loan insurance is also mandatory for going through an education loan with an NBFC.
Factors Determining Collateral Requirements for Education Loan Eligibility Criteria
When it comes to choosing between a secured and unsecured education loan, the first consideration is the eligibility criteria. To determine which loan is most suitable, it's essential to understand how the eligibility criteria for secured and unsecured education loans differ.
For unsecured education loans, lenders typically evaluate the applicant's past academic performance, the course they are pursuing, and the country where they will be studying. Note that STEM-related courses are generally viewed more favorably, as they are seen to offer better employability prospects and higher expected income.
In contrast, secured education loans have more flexible eligibility criteria, as the lender has the security of collateral to mitigate potential risks. This means that even if the applicant's co-applicant does not have a stable income or is retired, they can still be considered for a secured loan.
Co-applicant Profile
Another critical factor lenders consider for unsecured education loans is the co-applicant's profile. The co-applicant must have a good income, file IT returns, and provide income proofs to be considered eligible.
Who can be a co-applicant?
For government banks, accepted co-applicants include parents, parents-in-law, siblings, spouses and guardians. Private banks and NBFCs have slightly different criteria, but generally, parents, parents-in-law, siblings and spouses are accepted as co-applicants.
Important factors for a good co-applicant profile for unsecured education loans include a CIBIL score of around 700, last 2-3 years' IT returns, income proof or business proof, income amount, age, and retirement status.
Documentation
The documentation required for unsecured education loans is typically less extensive than for secured loans. However, the specific documents required may vary depending on the lender and the individual applicant's circumstances.
Processing Time
The processing time for unsecured education loans is generally faster, taking around 7-10 working days, once all documents are submitted. In contrast, secured education loans can take months to process, due to the need for collateral evaluation and legal and valuation reports.
Embassy Acceptability
When applying for an education loan for abroad studies, it's essential to consider the visa requirements of the destination country. Some embassies may not accept unsecured education loans as proof of funds for visa applications, but collateral education loans are generally accepted.
Which is better: Secured or Unsecured Education Loan?
Ultimately, the choice between a secured and unsecured education loan depends on individual circumstances, including collateral availability, co-applicant income, course type and processing time needs.
Conclusion
In conclusion, choosing between a secured and unsecured education loan depends on various factors, including collateral availability, co-applicant income, course type and processing time needs. Secured loans offer more flexibility in terms of loan amount, interest rate and repayment period but require collateral and have longer processing times. Unsecured loans, on the other hand, have faster processing times and require no collateral but have stricter eligibility criteria and higher interest rates.
Students should carefully consider their individual circumstances and weigh the pros and cons of each option before making an informed decision. It's also essential to research and compares lenders, including public sector banks, private sector banks and NBFCs to find the best fit for their needs. By understanding the differences between secured and unsecured education loans and considering their unique situation, students can make the right choice and achieve their academic goals without financial burden.
By Education Loan Guru
