Why would a bank reject a collateralized education loan?


Every year, thousands of aspirants apply for education loans abroad to fund their dreams of studying abroad, but only a small percentage of them are successful. In the vast majority of loan rejection cases, students aren't even aware of the reasons why their application was turned down.

Factors behind Loan Application Rejection:

It is important to understand that rejection of your loan application may delay the arrangement of your finances and also increase your time and efforts to apply again. However, having precise knowledge of everything that might later delay or lead to the rejection of your loan application is a must.

Low CIBIL Score

The CIBIL score is not new to any of us, and aspirants who are planning for an education loan abroad must have become familiar with the importance of having a good CIBIL score. A good CIBIL score falls in the range of 720 to 900; this will help you stand out from the rest and will also highlight your worthiness for loan approval. Banks always check the CIBIL score of both the applicant and their co-applicant before considering the loan application of an applicant to avoid any future cases of non-repayments.

A CIBIL score of less than 600 is considered poor, and there is a good chance that the bank will reject your loan application because it will hurt your creditworthiness in their eyes.  Due to your risky financial profile, the bank may reject your loan application to avoid anticipatory future deferments.

Academic Profile

Students with an excellent academic profile are standing apart from the crowd, and banks, especially public banks, give preference to students. Usually, students from technical and professional backgrounds are given higher preference. Students with poor academic scores have a negative impact on their loan profile, so it is advisable for all students who wish to apply for an abroad education loan to have good scores in their 10th, 12th, and graduation years to improve their chances of getting a loan from the bank.

Incompleteness of a course in its average duration is also regarded as poor academic performance. Many banks have set the benchmark of having a 60% or definite score for students to apply for an education loan abroad in their field.

Country chosen for Abroad Education

This is one of the relevant factors in the foreign education loan. There is a prevalent myth that you can get a loan from any country in the world. Banks, whether private or public, maintain their own list of countries to which they lend loans. Usually, students opting to study in the below-listed countries are highly preferred:

  • UK
  • Canada
  • Ireland
  • Germany
  • Australia
  • France

Countries such as China, Afghanistan, and Ukraine are examples of countries that do not receive loan approval from lending institutions or are countries that are red zoned and prohibited by the Indian government.

Courses for Higher Education

Your field of study will also have a huge impact on your loan application; courses like STEM and engineering fields have high rates of loan approval by the banks. The reason for this is that STEM and medical courses have the potential for high-paying jobs, reducing the chances for banks to take a risky gamble.

However,courses like management and other professional courses related to technical, legal, or medical backgrounds also have satisfactory rates of loan approval by the banks. Higher education like master's, diploma, and certificate courses is also considered by the bank.

Students from other fields, on the other hand, can apply to private banks and NBFCs because they offer a wider range of courses and have a greater chance of approval than public banks, which offer a limited and restricted list of courses for lending foreign education loans.

False and incomplete collateral documents

Documentation is one of the most important parts of your loan application. Any discrepancy or false information will directly lead to the cancellation of your loan. If you are planning to take the collateral-based loan and pledge any of the eligible collateral, keep all the documents handy and check them before handing them over to the bank. If the bank starts verification, a minute mistake will directly have a negative impact on your loan approval.

The documentation process for abroad education loans differs from bank to bank; if you are taking a collateral loan, you will have to take care of the documents to avoid any false statements later.

It is a complete myth that applicants with collateral will have a higher rate of loan approval; in fact, in the case of incomplete and fake documents, they have higher chances of loan rejection as well. It's important to have precise knowledge of eligible collaterals that are acceptable by banks, and collaterals like agricultural land, unconstructed land, and property coming under Panchayat jurisdiction are some examples of non-eligible collaterals. If agricultural land is converted into residential property, conversion documents are required.

Some major documents for collateral education loans are:

  • Property title deed
  • Copy of municipality approval of plot and plot layout
  • GPA papers (General Power of Attorney)
  • Registered sale agreement, gift deed, or will
  • Allotment letter from the municipal corporation
  • Property tax and electricity bills are determined by the property address.

The collateral documents listed above may vary depending on the bank's policy on lending collateral-based loans.

Type of education loan:

Yes, the type of education loan also matters in the rejection of your loan by the bank. However, it is not necessary to take the collateral-based loan if you don’t have it. An unsecured loan is also available for students in the case of a foreign education loan. Though the loan amount provided by the bank is only up to Rs. 10 lakh and the rejection rates for an unsecured loan are higher at the public bank in comparison to private banks, So it's important to make a plan for where you want to apply for your education loan. Public banks are considered the best choices for collateral-based loans, and for unsecured loans, you can turn to NBFCs and private banks.

Admission or Offer letter from  the university

This is the happiest moment for every student who applied to universities and secured admission there. An offer letter is the official proof of your admission to the desired university, and you have already won half the battle by getting the unconditional offer letter from the university. After getting the university offer letter, you can apply for the education loan at any bank where you meet the eligibility criteria. Students who do not have the offer letter have a higher chance of not getting the loan from the lender.

All of these factors are important because they highlight the minor errors that can have a negative impact on your loan profile, ultimately resulting in rejection by banks. By keeping these factors in mind, students can successfully change their ways to prevent loan rejection.

Students can consult an Education Loan Guru if they are planning to apply for education loans abroad.


By Education Loan Guru