Secured vs Unsecured Education Loans: Which One to Choose and Why?

Secured vs Unsecured Education Loans

Education loans have grown in popularity in India as the number of people attending college from abroad has increased and education prices have risen. MBA programmes at top Indian business schools can cost between Rs. 15-25 lakhs, whereas programmes at top international business schools can amount to INR. 50 lakhs. Living & travel expenses add to this cost, making it difficult for most students to cover the entire cost of college through family funds. That is why students opt for education loans to fund their study abroad expenses. In this blog, you’ll get information on Secured vs Unsecured Education Loans. So without further ado, let’s read!

Must Read: Best Education Loan in India

Why Choose Education Loans?

Education loans are a superior option to fund higher education because they provide tax benefits underneath Section 80E, have adjustable repayment terms, and actually shield your parents’ retirement savings. Many banks and NBFCs in India provide school loans at competitive interest rates, with the additional benefit of a moratorium period and no margin money. Some NBFCs will even pre-approve your education loan before admission confirmation, allowing you to apply to overseas universities with the necessary proof of money.

Education loans are divided into two types: secured and unsecured.

Must Read: How to Get an Education Loan for Studying Abroad?

Secured and Unsecured Education Loans

Secured loans, even as the name implies, are backed by collateral. Unsecured loans, on the other hand, do not demand collateral. Let’s take a closer look at collateral.

Secured vs Unsecured Education Loans: What is a Collateral?

To reduce risk, most financial institutions ask school loan candidates to pledge an asset for their loan.

What are the Types of Collateral?

Collateral could be a tangible asset such as non-agricultural land, a house, an apartment, a bungalow, a shop, or a non-tangible asset such as a deposit account, life insurance, or stocks. Different financial organisations may use different types of collateral.

Why is Collateral Required?

If a borrower fails to pay back the loan, the lender uses the collateral secured against the loan to compensate for the losses. Because the risk involved with an unsecured loan is greater, the interest rate on an unsecured education loan is higher than the interest rate on a secured education loan.

What Should be the Value of Collateral?

The collateral value could be less than, equivalent to, or greater than the loan amount. Every applicant has a distinct profile and set of qualifications. Financial institutions evaluate each profile uniquely, therefore the value of your security is determined by a variety of criteria.

These factors include, but are not limited to – 

  • Student’s academic track record
  • The loan amount and tenure
  • The creditworthiness of the borrower/co-borrower
  • Ranking of the institution the student will be attending

Before qualifying for an education loan, you should research and evaluate the products offered by different financial institutions, since each has its unique set of terms and collateral requirements.

Some NBFCs provide up to Rs. 35 lakhs in unsecured education loans. Unsecured loans are extremely useful for students who do not have collateral but have a stellar academic record.

Students who have been accepted to a top-tier university can also apply for unsecured loans because their employment prospects and ability to repay loans are increased.

Furthermore, students with co-borrowers who have excellent credit scores, consistent income, and a clean financial history may be eligible for collateral waivers.

Must Read: Documents Required for Education Loan

Secured vs Unsecured Education Loans: Conclusion

Aside from being easier to obtain, a secured loan contract is usually more favourable to the borrower than an unsecured loan. Repayment periods are frequently much longer, interest rates are lower, and borrowing limits are higher. All of these factors indicate that a secured loan is preferable for the borrower.

Lenders prefer secured loans to unsecured loans because they are less risky to make. Because borrowers must provide an asset as collateral to obtain a secured loan, the lender has a degree of certainty. The lender is guaranteed to recoup the loaned funds, and even if he does not, the asset can be used to recover the loss of nonpayment. This is all about Secured vs Unsecured Education Loans in India.

Must Read: Things to Know Before Applying for a Study Abroad Education Loan for Your Child

FAQs 

Q1. What is the difference between an unsecured and a secured loan?

Ans. The major difference between unsecured and secured loans is Collateral A secured loan gets its name from the fact that it is “secured” with collateral and Credit rating. Lenders will generally do a credit check irrespective of their needs; however, secured loans give flexibility with those requirements.

Q2. What does secured or unsecured debt mean?

Ans. When filing for bankruptcy, you’ll need to know how to classify your liabilities into unsecured or secured categories. If you don’t pay your bill, a secured creditor might repossess the property you purchased. Unsecured creditors are unable to. For example, most buyers grant a mortgage lender a lien on the funded home.

Q3. How is secured lending different from unsecured lending?

Ans. In general, secured loans have lower rates of interest than unsecured loans. 1 Lenders are less concerned about secured loans because the collateral can be confiscated and sold if the borrower fails to pay. Unsecured loans carry higher interest rates because lenders consider them to be a bigger risk.

This was all about Secured vs Unsecured Education Loans. If you need assistance in choosing the right loan for studying abroad, international money transfers or international bank accounts, reach out to Fly Finance for assistance.

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