Collateral for Education Loan to Study Abroad: Top Collateral Security Accepted in India

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One of the main concerns for students wanting to study abroad is the need to pledge collateral, like their parents’ house or another valuable asset. However, collateral is best seen as an asset that can get you access to a student loan, which in itself could be life-changing for you. 

That aside, we must acknowledge that there is more to the question of collateral than meets the eye. For instance, you could get an education loan for an amount sufficient to cover your education expenses, without having to pledge collateral. Also, if you do pledge collateral, you can get better terms on your education loan. 

So, this guide will tell you everything that you need to know about Collateral for Education Loan to Study Abroad. We’ll cover the basics, including the types of collateral accepted for education loans and whether some types are better than others.

What does collateral for education loans mean?

Collateral for an education loan is security that protects lenders in case the borrower defaults on repayments. The main purpose of collateral-backed loans is to assure the lender that they can recover their money if the borrower fails to repay the debt.

Collateral security can be any type of asset, movable or immovable, that a borrower offers a lender. If the borrower cannot pay back the loan, the lender can possess and sell the asset to recoup the money lent.

Common types of collateral include houses, fixed deposits, and commercial land. In some cases, high-value life insurance policies can also be used as collateral.

When a borrower pledges collateral, it typically allows them to access a larger loan amount or more favorable interest rates. Lenders assess the collateral’s value to determine the loan amount they are willing to offer. For example, if a borrower offers a property valued at ₹50 lakhs, the lender may approve a loan amount up to a percentage of that value, often 80-90%.

But then, how do lenders assess the price of the securities. When determining the value of collateral required for an education loan, lenders consider several factors:

1. The most critical factor is the asset’s current market value. Lenders typically require a professional valuation to determine this.

2. Lenders assess how quickly the asset can be converted into cash, as this affects its usefulness as collateral.

3. The borrower should have clear legal ownership of the collateral. Any issues or disputes related to the asset could make the loan process more challenging.

4. For assets like property, factors such as condition, location, and potential for appreciation influence the asset’s value.

Students don’t necessarily have to pledge collateral, because most lenders also offer no-collateral education loans. Let’s understand both types next. 

Types of student loans: Secured and unsecured

Secured Loans

As we said above, secured loans are ones against which you pledge an asset as collateral. The primary advantage here is the lower interest rates compared to unsecured loans, as the lender has a safety net in case of default. It is also easier to get approvals for loans if you offer collateral.

Additionally, borrowers may qualify for larger loan amounts based on the value of the collateral. For instance, say your familial income is ₹1 lakh per month, but your ancestral house is worth ₹1.5 crore. If you wanted an education loan of ₹1 crore for a Master’s in the USA, no bank would sanction the loan based on income. 

But if you used the house as collateral for an education loan, then you could easily get the loan sanctioned. This makes secured loans an attractive option for students.

However, there is always the risk of losing the pledged asset if the borrower fails to repay the loan. Therefore, it is crucial for borrowers to carefully assess their repayment capacity before opting for this type of loan.

Unsecured Loans

The other type of student loan is the unsecured one. As the name suggests, with an unsecured loan no collateral security is required, and the lender uses other metrics to assess your loan eligibility. 

These loans are based primarily on the creditworthiness of the borrower and their co-borrower. 

For co-borrowers, a blood relative is often required and usually is a parent or guardian. The key characteristics of unsecured loans are as follows:

1. No assets need to be pledged as security.

2. The interest rates on unsecured loans are usually higher, at around 10% to 15%. To contrast, secured loans usually have interest rates between 8% and 12%. 

3. Unsecured loans typically have lower borrowing limits, often capped at around ₹10 lakhs for studies in India and ₹20 lakhs for studies abroad.

4. For higher amounts (> ₹20 lakhs) you’ll have to look at NBFCs because banks generally do not offer unsecured loans higher than that amount. 

Unsecured loans are beneficial for students who have talent and motivation, but no assets to pledge as security. However, unsecured loans need to be managed very carefully and paid off as quickly as possible because of those high interest rates.

Here’s an overview of the difference between the two kinds of education loans.

Next, let’s look at the types of collateral security that are accepted for an education loan.

Also Read: Collateral vs Non Collateral Education Loan for Abroad Studies

Types of collateral accepted for education loans

1. You can use your bank FD as collateral for an education loan. However, the loan is (usually) only 75% to 80% of the FD value. Also, the FD value on the date of application is what’s counted, not the projected maturity value.

2. Investments in stocks, bonds, and mutual funds can also serve as collateral.

3. Real estate such as residential properties, land, or commercial properties can be pledged as collateral.

4. Gold, silver, precious metals, and gemstones are also usually accepted as collateral for an education loan.

5. Life insurance policies that are of a high value (typically ₹2 Crore+) can also sometimes be used as tangible collateral security for an education loan.

Important note: You are not allowed to use agricultural land as collateral security for education loans. Additionally, if any type of land is “disputed” (i.e. with legal proceedings ongoing), then you cannot use that as security either. 

Also, you need specific types of collateral documents for an education loan. For each type of asset listed above, you need certain documents, as listed below:

1. For fixed deposits, you will need the original certificate for the FD that was issued to you by the bank.  You also need a lien letter, which allows the bank to place a lien on your FD. This stops you from liquidating it without the bank’s permission. The FD always remains in your name even when held as collateral.

2. If you’re pledging investments like stocks, bonds, or mutual funds, you’ll need to provide statements showing the current market value of these securities. For shares and bonds, the depository participant’s (DP) account statement is asked for. In mutual funds, the latest account statement or holding statement will be needed. You may also need to sign a pledge agreement with the lender, allowing them to take control of these securities in case of default.

3. For real estate, you will first and foremost need the title deed, which is the legal document showing ownership. A recent property tax receipt may also be required, along with a valuation report from an approved appraiser.  You will also need to show an encumbrance certificate — it shows the property is free of any legal liabilities or loans.  Lastly, you might need the approved building plan and completion certificate. This is usually asked for if the property is very new, or if it has not been handed over yet. On a case basis, you could also need an NOC (No-Objection Certificate) from the housing society or association, if applicable. 

4. For jewelry, you will need to submit the items to the lender, who will give you a pledge document in return. You would also need a valuation from an appraiser chosen by the lender before loan disbursement.

5. If using a life insurance policy, you’d need to turn over the original policy document, and a surrender value certificate. The surrender value certificate comes from the insurance company and must be sent directly to the lender. You’ll also need to fill out and submit an assignment form, which legally assigns the policy to the lender as collateral.

Here is a summary of the types of collateral required for an education loan.

Why is collateral required for education loans?

Here are some reasons why banks require collateral before they issue an education loan:

1. Education loans are almost always large, and lenders need to mitigate the risk of non-repayment. With collateral, lenders can ensure that they’ll have some compensation.

2. Secured loans with collateral always come with a lower interest rate. This is because the lender has some form of security, as stated above, which gives them the leeway to offer lower finance rates.

3. Lenders are also more open to approving higher loan amounts with collateral. They have more confidence when there is a tangible, physical asset backing the loan value.

4. For borrowers with a lower credit score, or with a limited credit score (young professionals especially), a collateral-backed loan is an almost assured thing. With collateral, the risk for the lender is compensated for, allowing speedy loan approvals and disbursement.

5. Lenders can package and sell education loans backed by collateral as securities to investors. This process, known as securitization, allows lenders to free up capital and make more loans available to borrowers.

6. Most financiers are more open to loan restructuring for collateral-backed debt. In other words, lenders may be more willing to work with borrowers to modify loan terms or provide additional support if there is collateral involved.

We mentioned that when you seek an educational loan with collateral, you are likely to get a lower interest rate, which can save you several lakhs in interest expense. However, for students who want loans without collateral, many top Indian banks and NBFCs and international NBFCs now offer collateral-free loans. Whichever type of loan you require, FundRight can help. 

What sets FundRight apart is that on our platform, lenders “bid” for your loan, competing to offer you the lowest interest rates. This ensures you get the best possible interest rates and terms.

Here’s how FundRight works:

1. Sign up and complete your profile.
2. Within two days, get multiple competitive loan offers from top lenders.
3. Review the offers based on interest rates, repayment terms, and other conditions.
4. Get guidance from FundRight’s financial advisors to help you choose the best loan and negotiate terms.
5. Securely upload the required documents through the FundRight platform and wait for loan approval, which can take as little as 10 days.

And with that, we come to the end of this article on collateral for an education loan. We hope you found it useful, and we’ll see you in the next one.

Other Banks & NBFCs Offering Education Loan to Study Abroad:

• Union Bank of India Education Loan
• Yes Bank Education Loan
• IDFC Bank Education Loan
• Bank of India Education Loan
• State Bank of India Education Loan
• Tata Capital Education Loan
• Auxilo Education Loan

FAQs about collateral for an education loan