When applying for an education loan, one of the key terms that often comes up is “collateral.” Many students who seek financial assistance understand the concept of collateral and its role in securing loans. Collateral acts as security for the bank or financial institution, ensuring the loan repayment. In this blog, we will explain what collateral in education loans means, the various types of assets accepted by banks, and the key factors students should consider when pledging assets.
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What is a Collateral in Education Loan?
Collateral is an asset or property that a borrower offers to a lender as security for a loan. In the case of an education loan, collateral is typically required for larger borrowings or when the borrower’s creditworthiness is insufficient to guarantee repayment.
The lender holds this collateral as a safeguard, meaning if the borrower fails to repay the loan, the lender has the right to seize and sell the collateral to recover the outstanding loan amount. It also plays a crucial role in determining the loan approval process and the terms, such as the interest rate and repayment duration.
- In India, education loans are above a certain amount. As per RBI guidelines on education loans, public banks generally require collateral on loans above INR 4 lakhs.
- Private banks and NBFCs provide education loans without collateral for higher loan amounts, usually up to INR 1 crore.
Also Read: Learn about how much education loan you can get without collateral. Explore financing options for higher education without pledging assets like property.
Types of Collateral Accepted for Education Loans
Lenders accept various types of assets to secure student loans. The type of collateral required depends on the loan amount, the borrower’s financial situation, and the lender’s policies. Some common forms of collateral accepted by banks and financial institutions include:
Property (Real Estate)
Real estate is the most commonly accepted form of collateral in education loans. This can include residential or commercial properties, such as land, houses, or apartments.
When you pledge property as collateral, the value of the property typically determines the loan amount you can borrow. The property must be legally owned by the borrower or co-applicant, and the bank will carry out a valuation before accepting it as collateral.
Fixed Deposits (FDs)
Fixed deposits are another common collateral option for education loans. If you or a co-applicant holds an FD in a bank, you can pledge it as collateral and apply for an education loan against Fixed Deposits.
The bank will use the FD as a security guarantee for the loan. This option is usually preferred by students or parents who do not own significant real estate but have savings in the form of FDs.
Life Insurance Policies
In some cases, life insurance policies with a surrender value can be used as collateral. The borrower pledges the policy to the bank, and the value of the policy is used to determine the loan amount. This option is generally available for smaller loan amounts.
National Savings Certificates (NSC) and Kisan Vikas Patra (KVP)
Students can also pledge securities, such as government-backed savings instruments like NSC and KVP, as assets/ securities for the loan. Banks consider these instruments low-risk, and the loan amount will be based on the value of the certificates. SBI, ICICI Bank, HDFC Bank, etc and other popular NBFCs offer education loans against securities.
Gold
In certain cases, banks may accept gold (in the form of jewellery or coins) as collateral for smaller loan amounts. The gold’s value will be assessed by the bank, and the loan will be disbursed based on its worth.
Third-Party Guarantee
Instead of a physical asset, banks may also accept a third-party guarantee, where another individual (usually a family member) guarantees repayment of the loan. In case of default, the bank can claim repayment from the guarantor.
How to Choose the Right Collateral in Education Loan?
Selecting the right collateral is crucial when taking financial assistance from the lender. Collaterals provide security to the lender and enable students to avail of loans for their higher studies. However, it is important to choose the most suitable type of collateral based on the loan amount, the value of your assets, and the lender’s policies.
1. Understand Loan Amounts and Requirements
In India, banks typically require collateral for education loans exceeding INR 7.5 lakh. For smaller loans, collateral may not be necessary. It’s crucial to assess the amount you need before selecting collateral.
2. Evaluate Asset Value
The value of the collateral will directly influence the loan amount. Banks lend up to 80-90% of the asset’s market value. For example, if you have a property to pledge, banks will assess its current market value through a formal valuation. Consider the liquidity of your real estate as well, as selling property can take time and effort.
3. Choose the Right Type of Asset
Different types of collateral offer varying levels of risk and convenience. While real estate offers high value, it involves long processing times and risks if you default on the loan. On the other hand, FDs and gold are low-risk and simple to pledge. FDs can be ideal for quicker loans, while gold can be useful for smaller loans but is not suitable for larger amounts.
4. Evaluate Liquidity and Access
Collateral like FDs and gold are more liquid than real estate, which may take time to sell. Opt for liquid assets if you need quicker access or prefer to avoid delays.
5. Understand the Risks Involved
Pledging collateral means the asset could be seized in case of a default. Assess your ability to repay the loan before choosing collateral to minimize risks.
Also Read: Check all the details on how to get an education loan for abroad studies without collateral. know the process and mode of application.
Collateral-Free Education Loans: Is It Possible?
Yes, securing an education loan without collateral is possible, especially for loans up to INR 4 lakhs. Most banks like SBI require a third-party guarantee for loans between INR 4 to 7.5 lakhs. Government schemes like the Pradhan Mantri Vidya Lakshmi Yojana and the Credit Guarantee Fund Scheme (CGFSEL) offer education loans without collateral for eligible students.
Additionally, some banks may provide loans without collateral for courses at recognized institutions, based on the applicant’s academic credentials and repayment capacity. Several Indian banks offer higher loan amounts on collateral-free education loans depending on the student’s financial profile and academic qualifications. Here’s the list of some leading banks–
- ICICI Bank: Up to INR 1 crore
- Axis Bank: Up to INR 75 lakhs
- HDFC Bank: Up to INR 50 lakhs
- IDFC First Bank: Up to INR 50 lakhs
- Union Bank of India: Up to INR 40 lakhs
- YES Bank: Up to INR 40 lakhs
This was all about collateral in education loans. To learn more about education loans, the best bank accounts for students, forex, banking experience for global students, or international money transfers, reach out to our experts at 1800572126 to help ease your experience with studying abroad.
FAQs
Collateral is an asset pledged by the borrower to secure an education loan. It provides the lender with a guarantee that the loan will be repaid.
Common types of collateral include property, fixed deposits, gold, life insurance policies, and government bonds. Each type has its own advantages depending on the loan amount and value.
Lenders require collateral to minimize risk, especially for higher loan amounts. It ensures they have a backup in case the borrower defaults on repayment.
Secured loans require collateral, while unsecured loans do not. Unsecured loans typically have lower amounts and higher interest rates due to the lack of collateral.
If you default on a secured education loan, the lender can seize and sell the collateral to recover the outstanding loan amount. This may impact your credit score and financial future.
Consider the value, liquidity, and risks associated with each asset. Choose collateral that matches the loan amount while ensuring you’re comfortable with the risk.
Yes, many government schemes and certain banks offer collateral-free education loans for smaller amounts (typically up to ₹7.5 lakh). Eligibility depends on the borrower’s profile.
To use property as collateral, you must provide legal documents proving ownership and undergo valuation by the lender. Ensure clear legal titles to avoid complications.
A common myth is that all education loans require collateral. In reality, collateral is only necessary for larger loans or when applying with certain banks or lenders.
Alternatives include securing a loan with a co-applicant (such as a parent) or opting for government-backed education loan schemes. Some banks also offer loan guarantees.
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