What are the Risks of Taking a Student Loan Against Property for Education

Financing higher education can be difficult, especially if scholarships or grants are not available. In such cases, borrowing money is the only viable option. A student Loan Against Property is one type of loan people can consider. This loan is secured by one's property and can provide individuals with access to large sums of money to help finance their education. However, as with any other type of loan, there are risks and drawbacks to taking out a student Loan Against Property for education. Before deciding to take out such a loan, it is critical to consider these factors. 

Understanding Education Loan Against Property

An education Loan Against Property is a secured loan obtained by a property owner in exchange for the use of their property as collateral. Residential or commercial property can be used as collateral. The loan amount is determined by the property's value and the loan-to-value (LTV) ratio. LTV is the percentage of the property value that a financial institution can lend to the owner as a loan. 

Borrowers may take out a Loan Against Property for a variety of reasons. The borrower is not required to explain the reason for the loan to the financial institution. 

A student Loan Against Property is a type of secured loan designed to assist people in financing their education. Because this loan is secured against one's property, the borrower must provide collateral to the lender to obtain the loan. Student loans against property are available for a longer loan term and a higher loan amount, making it an appealing option for individuals who require large sums of money to finance their education. 

One advantage of student Loan Against Property for education is that LAP has a lower interest rate, since it is a secured loan. Additionally, LAP allows individuals to borrow larger amounts of money, since the loan amount is based on the value of the property being used as collateral. Remember that LAP requires collateral, and failure to repay the loan can result in the loss of the collateral property. 

Factors That Affect Education Loan Against Property

Several factors can influence a student loan secured by property, including: 

• Credit Score: A good credit score is required to qualify for a student loan secured by real estate. Credit scores are used by lenders to assess a borrower's creditworthiness, and a high score can help secure better loan terms. 

• Property Value: The loan amount and interest rate will be influenced by the value of the property offered as collateral. If the property has a high value, lenders will typically offer larger loan amounts and lower interest rates. 

• Income: Income and employment status of the borrower are important factors in determining loan eligibility and repayment terms. A stable income stream can increase the likelihood of loan approval and lower interest rates. 

• Loan Tenor: The loan tenor is the amount of time that the loan must be repaid. Loans with longer terms typically have lower monthly payments but higher interest rates. 

• Interest Rate: The interest rate is the cost of borrowing the loan amount and affects the total amount owed by the borrower. The interest rate can be fixed or variable, depending on the borrower's credit score, loan term, and property value. 

• Other Financial Obligations: The borrower's other financial obligations, such as credit card debts, personal loans, or existing mortgages, also affect their eligibility for a student loan secured by property. Lenders will look at the borrower's debt-to-income ratio to see if they can afford the loan. 

Also Read: Education Loan Rejected? Loan Against Property is a Better way to Finance Your Child’s Education 

Eligibility for Student Loan Against Property

Loan Against Property eligibility criteria for a student loan secured by real estate vary depending on the lending institution. However, borrowers are expected to meet the following general requirements: 

• Applicants must be Indian citizens living in the country 

• Applicants should ideally have a CIBIL score that is 750+ 

• Salaried and professional applicants must be between 28 and 60 years of age 

• Self-employed applicants must be between 25 and 70 years of age 

• Salaried applicants must be employed with a reputed firm with a minimum work experience of 3 years 

• Self-employed applicants must be able to establish a minimum of 5 years of business continuity in their existing business 

A Loan Against Property EMI calculator may be used to determine the EMI amount before actually applying for the loan.  

Risks involved in Availing of Student Loan Against Property

• In the event of a default, the borrower may lose the property: An education Loan Against Property is a long-term commitment to pay EMIs on time and on schedule. If the borrower runs into financial difficulties and fails to make EMI payments, the financial institution may seize the property, sell it, and recoup the outstanding loan amount. Any excess proceeds from the property sale are returned to the borrower. As a precaution, a borrower should keep a few months' EMI in a separate bank account. They will be useful in times of financial stress. 

• Longer time for loan approval and disbursement if documents are not in place: If the property documents are not in place, the LAP may take longer than other loans, such as a personal loan. The financial institution must examine all property documents, have the property valued, and so on. If there are issues with the property documents, such as missing documents or unclear property titles, the entire LAP process may be delayed. While these procedures can be time consuming, banks and NBFCs are taking steps to speed up the overall LAP process. 

• Your loan amount will be less if the LTV is low: The financial institution does the property valuation from their appointed property valuers. Following the completion of the property valuation, the financial institution will apply the loan-to-value (LTV) ratio.  

For example, if the borrower's property is valued at Rs 50 lakhs and the LTV is 60%, the borrower will be eligible for a maximum LAP of Rs 30 lakhs. 

• In times of rising interest rates, a floating rate may have an impact on cash outflows: A floating rate LAP may be approved by financial institutions. During a rising interest rate scenario, the interest rate will be revised upwards from time to time as market interest rates rise. When interest rates rise, it will result in a higher EMI outflow. Higher interest rates may cause financial hardship for the borrower and can even lead to default.  

• You will need to pay processing fees and other charges: Though not a risk, you should be aware that you need to pay processing fees before signing the loan agreement. You need to inquire with the financial institution about the amount charged as a processing fee and any other fees that may apply.  

An education Loan Against Property has many advantages and a few disadvantages. The benefits of using your property for productive purposes include faster processing, lower interest rates, higher loan amounts, and longer tenure. Cons include losing the property in the event of default, having the loan amount limited to the property valuation and LTV, and having to deal with floating rates in the event of rising interest rates. So, weigh the benefits and drawbacks and decide what is best for you. 

Also Read: Role of Collateral in Student Loans Against Property