On getting started with their research on education loans, every student comes across these two terms undoubtedly, Secured and Unsecured Education Loans. Everyone already kind of has an idea of what a secured education loan or an unsecured education loan is. 

A secured loan is a loan that involves collateral and an unsecured loan does not involve any collateral. But there’s so much more to it than just that. The loan amount offered differs in both and so does the interest rate. 

Many students have questions like, “How is the collateral value calculated?” “Who is the best lender to take a secured education loan?” “Who is the best lender to take an unsecured education loan?” “Which one is the best for me?” “What is the Eligibility Criteria?”, etc.

To get answers to all of these questions and more, keep reading the article. If you feel that we didn’t cover any topic in this article, you can reach out to us in the comment section. 

What is A Secured and An Unsecured Education Loan?

To answer this, we first have to know what an education loan is. An Education Loan is the funding provided by financial institutions like banks or NBFCs for students to be able to pursue their education be it a bachelor's, a master's, a Ph.D, or any vocational course. The funding provided by the education loan can be used to study anywhere in the world, India or Abroad.  

Secured Education Loan

A secured education loan is a kind of loan where you would need to offer collateral or security (any kind of property) to get the loan.  

Unsecured Education Loan

An unsecured education loan is a kind of loan where you are offered the loan amount without having to pledge any collateral or security.

Types of Accepted Collateral and How its Value is Calculated? 

There are primarily two kinds of collateral accepted for an education loan, immovable property and liquid security. We’ve listed them down:

Accepted Immovable property:

  • House
  • Flat
  • Non-agricultural land

Liquid Security:

  • Fixed deposits
  • Insurance policies (term insurance)
  • Government bonds

How is it calculated?

Banks and financial institutions do so by giving out a valuation report to the collateral which is given out by a bank-approved civil engineer which quantifies the value of the property to be considered for the loan. 

There are generally 3 values mentioned in the valuation report: Fair Market Value, Realizable Value, and Distressed Value. 

  • Fair Market Value: If the asset was sold today in the current market, the value it was sold for would be considered the fair market value. 
  • Realizable Value: The realizable value of a property is the expected selling price of the asset in the future after removing the costs of selling the property. 
  • Distressed Value: It is the value of the property after considering all forms of depreciation possible to the property. The distressed value of the property is generally calculated considering the tenure of loan repayment, the proximity of the property to the urban, the age of the asset, and the expected future market. 

The value of your collateral and the loan amount you are offered depends on these three factors.

Comparison of Lenders For Secured and Unsecured Education Loans 

In this section, we are going to explore and compare all the aspects of a secured and an unsecured education loan like the Loan Amount, Interest Rate, Type of Interest, Moratorium period, Documentation, Processing time, and Embassy Acceptability.

Parameters Secured Education Loan  Unsecured Education Loan 
Loan Amount  Upto 1 Cr (For India)
Upto 1.5 Cr (For Abroad)		 Upto 1 Cr (For India)
Upto 1 Cr (For Abroad)
Interest Rates 8.15% to 10.5% 10.5% to 12.5%
Type of Interest  No interest during the moratorium Partial or simple interest during the moratorium period
Repayment duration 15 to 20 years  10 to 15 years 
Moratorium Period  Course duration + 6 months Course duration + 12 months
Documentation Requires a lot of paperwork  Relatively less paperwork 
Processing Time Minimum 15-20 days*  Can be done in 3-4 days* 
Embassy Acceptability  All countries’ embassies accept secured loans as proof of funds. A few countries do not accept unsecured loans as proof of funds for the student visa process.

*On going through with WeMakeScholars

As we can observe from the above table, a secured education loan is very flexible in terms of the loan amount, interest rate, and repayment period when compared to an unsecured education loan. Whereas it significantly falls behind in the time required for processing the loan and documentation.

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.

Parameter  Public Sector Bank Private Banks  NBFCs
Maximum Loan Amount  Upto 1.5 Cr (Secured)
Upto 7.5 Lakhs (Unsecured)		 Depends on the collateral (Secured)
Upto 1 Crore (Unsecured)		 Depends on the collateral amount (Secured)
80 Lakhs (Unsecured) 
Rate of Interest * Starts from 8.15% Starts from 9.99% Starts from 11%
Processing Fee 10K + GST 0.5% to 1.5% 1% to 1.5%
Repayment tenure  15 to 20 years  10 to 15 years  10 to 15 years 
Processing time 10-15 days  1 week  3-4 days

*Click here to check the latest ROI 

Factors Determining Collateral Requirements For Education Loan

Eligibility Criteria

The first thing when it comes to choosing either one of these loans is the eligibility criteria. You need to first understand how eligibility criteria for a secured and unsecured education loan differ to know which one you are the most suitable to get. They will check for your past academic records, course, and country for a non-collateral education loan. 

*Note: The course you are opting for has to be a STEM-related course for a higher chance of approval. Because STEM courses guarantee more chances of employability and higher expected income than non-STEM courses. For courses like MBBS, Ph.D., and other less job-oriented courses, you are required to pledge collateral to Government banks for an education loan as private lenders will not fund these courses at all.

Secured education loans have the same eligibility criteria as Unsecured Education Loans, but are not as strict compared to non-collateral education loans. Because, they can be more flexible on the eligibility criteria as they have the safety net of having a collatera to mitigate, in case the student becomes unable to pay back the loan after the moratorium period. 

Co-applicant Profile

Another important aspect that banks consider for an unsecured education loan is who the co-applicant for the education loan is. Your co-applicant must have a good income with proper ITRs and income proofs to be accepted as a co-applicant. 

Who is a co-applicant?

A person who is liable to pay the student’s loan if they don't. Primarily accepted co-applicants are Parents, Spouses, Parents-in-law, or guardians.

Whereas, for secured education loans, there are no such requirements. Even if your co-applicant doesn’t have a proper income source or even if they are retired, they can be your co-applicant. Which is not possible in the case of a non-collateral education loan. 

Who can be your co-applicant?

  • Government banks - Parents / Parents-in-law, Siblings, Parents siblings, Spouse, First cousins
  • Private banks - Parents / Parents-in-law, Siblings, Spouse
  • NBFCs - Parents / Parents-in-law, Siblings (preferable brother over sister), Spouse, Brother-in-law, Parents siblings, First cousins

Important factors to be considered a good co-applicant for an unsecured education loan :

  • CIBIL Score of around 700
  • Last 2-3 years IT Returns Documents
  • Income Proof/Business Proof
  • Income Amount
  • Age/ Retirement Status 

Whereas, for secured education loans, there are no such requirements. Even if your co-applicant doesn’t have a proper income source or even if they are retired, they can be your co-applicant. Which is not possible in the case of a non-collateral education loan. You would end up needing someone to be your financial co-applicant.

Who is a financial co-applicant?

If your primary co-applicant doesn’t have an income source or is retired, some financial institutions/ banks accept others as financial co-applicants. However, they need to have a proper income source with the required proof and ITRs filed. 

*Note: Some lenders waive off the requirement for a financial co-applicant if the applicant has a significant amount of work experience and is going to a prime-list university. Comment down your university to know if it is on the prime list.

Documentation

The required documents and documentation time, are less in non-collateral education loans when compared to that of collateral education loans. 

For a collateral education loan, you need to submit all the collateral-related documents as well. If you do not have certain collateral-related documents, for example, "Property Title Deed" then you'd have to get it by writing an application to the registrar of deed and all. 

The required documents to process an education loan can differ from one student to another, so if you want a comprehensive checklist made just for you, you can request a call back from us.

Processing time

The processing time for a non-collateral education loan is just about 7-10 working days, once all the documents are submitted. Since the evaluation of a student is done based on his profile and there aren't many documents involved, the loan processing time is very low. 

Unlike non-collateral education loans, collateral education loans may take months for the entire loan process. Because there is collateral involved, you first need all the collateral-related papers, following which the bank appoints a lawyer and an engineer who then submit the legal and valuation report to the bank after assessing your pledged property. Which ends up taking more time.

Embassy acceptability

When you take an education loan for abroad studies, you are also required to be aware of the visa requirements of the country you’re going to. For eg, different countries as per their visa requirements, require you to transfer your 1-year living expenses, 1-year tuition fee, or both before applying for a student visa.

Few embassies of certain countries do not accept unsecured education loans as a source of funds for the visa process, but they all accept collateral education loans (Not third-party collateral).

Which is better: Secured or Unsecured Education Loan?

To conclude this article, we are going to answer the question, which is better: secured or unsecured education loan? And as much as you’d like to hear it, there’s no right answer. It just depends on which is the most suitable for you. 

The primary factors end up being, whether you have collateral to offer, the country of your choice if your co-applicant earns well, the course you are going for (STEM or Non-STEM), How quickly you need the loan sanctioned, etc.

If you need any help choosing the right education loan for you, you can always contact our Financial officers, who’ll carefully analyze your profile, help you choose the best lender for you, and then process your loan through them. Of course, free of cost. As WeMakeScholars is an organization funded by the Ministry of Electronics and IT, Government of India, we provide all of our services for free to students.