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Collateral Education Loan 2024: Interest rates & Types of collateral
Collateral/ Secured Education Loan | Updated
Education loans are widely taken by hundreds of students every year to fulfill their dreams of studying abroad. The process of getting an education loan includes many steps and there is all this bank, loan jargon that needs to be clarified. We all come across terms like co-applicant, moratorium, interest rate, collateral, and others. In this article, we will specifically look at this term called- COLLATERAL.
What is collateral in an education loan?
Collateral refers to assets or property that a borrower offers as security to a lender in exchange for a loan or credit. The presence of collateral provides the lender with a form of guarantee, reducing the risk associated with lending money. If the borrower fails to repay the loan before the term ends, the lender has the right to seize and sell the collateral to recover the outstanding debt amount.
There are two types of collateral that banks accept as security for abroad education loans.
1. Immovable Property
An immovable property refers to assets that cannot be moved or relocated like land, a building, or a flat. Here are a few different kinds of immovable properties that banks accept.
A) Residential Property:
These are the most commonly used type of collateral in the case of an education loan. These properties include:
- Houses
- Apartments
- Villas
Requirements:
- The property should be free of any legal disputes and should be owned by the student or the co-applicant.
- All the documents for the property must be available.
- Banks also only accept the property only if clear boundaries are defined from the neighboring properties
B) Commercial Properties:
Commercial properties are the properties used for business purposes. Not all banks accept commercial property as collateral and the ones that do accept might require a higher collateral margin.
These properties can include:
- Shops
- Offices
Requirements:
- The student or the co-applicant must own the commercial property
- There should be proper documentation for the property.
- There shouldn’t be any legal disputes
Note: Not all banks accept commercial properties. For example, IDFC and ICICI Bank do not accept commercial properties for education loans.
C) Non-Agricultural Land:
Non-agricultural land refers to the land where farming is not performed. Non-agricultural land, such as plots for building houses or commercial complexes, can be pledged as collateral.
Requirements:
- The land should be legally registered and all the documents regarding it must be available.
- In some banks like the Union Bank agricultural land can be accepted as collateral.
Note: You can contact our financial officers by requesting a callback to know if your agricultural land can be pledged as a collateral or not.
2. Liquid Securities
Liquid security is a financial asset that can be easily changed into cash without any loss to its value. These are generally preferred by banks because of the ease in valuation of the property. Types of liquid security include:
A) Fixed Deposits (FDs):
A fixed deposit is a financial instrument provided by banks or non-banking financial institutions (NBFCs) where an individual deposits money for a fixed period and earns interest.
Requirements:
- The fixed deposit must be owned by the borrower or co-applicant.
- Banks mostly will consider the principal value of the FD
- Banks will hold the FD until the loan is repaid.
B) Life Insurance Policies (LICs):
A life insurance policy can be pledged as collateral. Most life insurance policy provided by the Life Insurance Corporation of India (LIC) is easily accepted especially those issued by Life Insurance Corporation of India (LIC).
Requirements:
- The surrender value is calculated in the evaluation and not the face value
- Only policies with a significant surrender value are accepted. Term life insurance policies that do not have a cash surrender value are usually not accepted.
C) Government Bonds:
Government bonds are debt securities issued by the government to raise funds. These bonds are considered safe investments, backed by the government, and are thus highly acceptable as collateral.
Requirements:
- The face value of the bond is considered for the loan.
- The bonds must be held in the borrower’s or co-applicant’s name and free from any encumbrances.
The loan given for higher education by taking immovable or liquid properties is a collateralized education loan. Thus, a collateralized education loan is defined as:
"A collateral education loan which is also known as a secured education loan is a loan where you are required to pledge a property or any other eligible financial assets to take the loan against it. This property and financial assets (immovable property or liquid security) you pledge to the lender are called collateral."
There is another type of loan that doesn't require any kind of collateral security which is known as a non-collateral loan or unsecured loan.
Rather than using collateral as security, lenders approve unsecured education loans depending on the income of your financial co-applicants, provided you're eligible for a non-collateral education loan.
We know the types of collateral and we will now understand how the properties are valued.
How are collaterals valued for an education loan?
Collaterals are valued early in the loan process to decide how much creditworthiness the property holds and the maximum loan amount you can get against that property.
One important thing to note is banks do not approve 100% value of the property. They put a margin on the property value called “Collateral Margin”. Banks do so to make sure they can lend as much money as they can recover excluding the losses that might incur on the property over the years due to inflation or depreciation.
Collateral margin is different for different banks. Below is a table containing values of loan margins applied by various banks.
Bank | Collateral Margin |
Karur Vysya Bank |
Depends on whether simple interest is paid during the moratorium.
|
State Bank of India |
|
Bank of Baroda |
|
Union Bank |
|
Axis Bank |
|
IDFC Bank | No margin (Does not accept commercial properties) |
ICICI Bank | No margin (Does not accept commercial properties) |
Valuation of immovable collaterals:
The valuation of immovable property is done by bank-approved valuators (engineers). Valuators will visit your property, check all the property-related documents and municipality approvals, click pictures of your property, and submit a brief report.
In the report, you will find three values:
- Fair Market Value
- Realizable Value
- Distressed Value
When calculating loan amounts, most banks use realizable value.
For example, After valuation, if your collateral value comes to 50 lakhs and the collateral margin is set at 20%, then 80% of the value will be considered which is 40 lakhs as a loan amount.
Valuation of liquid collateral:
- For Fixed Deposit - FD principal value is considered.
- For insurance policies - Surrender value is considered.
- For Government bonds - Face value is considered.
Liquid securities can be converted to cash instantly, thus eliminating the legal and valuation process resulting in faster loan processing time.
Loan limits and interest rates on collateral education loans
Collateral education loans are considered to be the best option to finance your studies abroad and in India, because you can get up to 1.5 crores as a collateral education loan or even more if required. The amount depends on the value of the pledged collateral.
Your total loan requirement for tuition fees and miscellaneous expenses.
As of March 2024, the interest rate on a collateral education loan in public banks is between 9.7% to 10.65% and between 10.99% to 13% with private lenders.
Now that you have reached this far after and know the loan amounts and rates of interest, you might want to take a collateralized education loan. For that, you will need some documents. Let us take a look at what they are.
Property documents required for education loan
Getting an education loan with collateral is easy if you have the required documents, you'll save a lot of your valuable time by arranging these documents in advance if you know the required collateral documents beforehand. We have listed all the needed documents in the list below:
- Property Title Deed
- Registered Sale Agreement/ Gift Deed/ Will
- Original registration receipt for the above agreement
- Allotment letter by Municipal corporation
- Copy of municipality-approved building plan or plot layout
- Latest property tax bill and electricity bill bearing the same address
- 30-year link document or previous chain of sale deed establishing title or EC is required.
Important things to keep in mind about property documents:
- Property should be segregated from neighboring properties. Must have clear boundaries.
- If a huge land was cut into multiple plots, then the mother-land registration deed is required.
- If the loan amount required is more than 1 crore rupees and the property is also worth more than 1 crore rupees, then, two legal and two valuation reports are required.
- Properties registered recently will not be valued by banks, instead, banks will go with the value shown at the time of registration.
If the property you are pledging is a gift deed, then, the documents you need to submit are:
- The gift deed and Will should be registered.
- The property should be registered in the new owners’ name.
- No Objection Certificate(NOC) should be obtained from owners’ siblings or relatives.
- Legal heir certificate and family tree certificate should be produced.
- The death certificate of the person who wrote the will should be submitted.
- Two legal reports are needed in the case of a gift deed.
So, these are the just collateral-related documents you are required to present when pledging collateral for an education loan. Other papers, such as KYC documents, academic qualifications, co-applicant papers, and so on, will also be required which is covered in-depth in this article- Required documents for Education loan.
Process of getting a collateralized education loan
You can start your education loan process as soon as you receive your admission letter from the university.
Thinking of going to the bank and processing your loan? That is a good idea. But do you know a better idea? Processing your loan with WeMakeScholars. We are faster and give you the best deal you can get with your profile. Take a look at the process:
- You need to fill out the loan application form provided by the banks. (With WeMakeScholars, you would only have to fill out one common application form that can be forwarded to all the banks).
- Next, you would have to submit all the required documents at the bank's branch. (We will provide you with the checklist of documents for different banks).
- The bank will then appoint a lawyer and a valuator for your collateral (for only immovable properties) for which you have to pay some 7K to 8K to banks as a fee to the lawyer and the valuator. They will submit the legal and valuation report of the pledged collateral to the bank.
- After receiving the legal and valuation report, The bank will send these reports along with other submitted documents to the central loan processing cell that handles the education loan process.
- The processing officer will look into your loan application and verify the application, and once done verifying the application, they will sanction the loan.
- Once your loan gets sanctioned, you'll get a sanction letter after paying the processing fee, which stays valid for about 6 months.
- At last, you and your co-applicants will have to submit all property originals to either CPC or the branch for mortgage creation. It involves stamp papers, affidavits, etc which will be charged at approx 0.5% of the loan amount, then the account is ready for the loan amount to be disbursed.
Why should you prefer a collateralized education loan?
A lot of students think pledging collateral for their education loan is risky and might be damaging to their property. But that is not true. Although the process of obtaining an education loan with collateral from Government banks can take weeks, if not months, you cannot ignore the benefits that come with it. It is suggested to go for a collateralized education loan. Here are the reasons why:
- A reduced interest rate helps you to save lakhs over time.
- Minimal processing fee of just 10K plus GST (refundable in a few public banks).
- Larger loan amounts and a longer repayment period compared to private lenders.
- The moratorium period of course duration plus 6-12 months where simple interest is charged but you are not obliged to pay anything to
- the bank during a moratorium period.
- Even after your moratorium period if you for some reason miss 2-3 months EMI, public banks won't get bothered much.
- Even if you miss 2-3 months of EMI following your moratorium period, public banks won't compound your interest.
- For your education, you can take practically any course in almost any country.
Do banks provide an education loan on a property under another loan?
There might be cases where the student has only one property to pledge and that property is under another loan. So, in such cases, will banks give you an education loan on the same property?
Yes, you can pledge collateral that is already under a loan as security for an education loan. For this, banks consider certain factors before finally approving the education loan-
- The market value of the collateral that is currently under a home loan.
- The pending home loan amount is to be paid.
- However, the collateral under a personal loan can not be pledged for an education loan.
To know more in detail about this, refer to this article- Education Loan On a Home Loan Property- Know Everything!
In conclusion, we can say that public banks give the best deal in the market for collateral loans. It is just that they take a longer time to process your loan if you go on your own. But when you go through WeMakeScholars, we expedite your loan process by coordinating directly with the loan processing department. Even if you don't have any collateral to pledge, or for some reason your collateral security is not accepted by the banks, WeMakeScholars can help you get a non-collateral education loan as well.
We hope this article provides you with all the knowledge you need about education loans with collateral. If you wish to get a collateralized education loan for your higher studies, get expert help from loan initiation to post-sanction. Request a call back now and speak to our financial officers.
Firdaus Ibrahim
Hritik Jain Scholarship Expert