The Role of Collateral in Student Loans Against Property

When students seeking educational loans hear the phrase "collateral education loan," they often become perplexed. It's because they're not sure what it is or what kind of protection it offers. Collateral is an asset that is pledged as security for your education loan. It serves as a guarantee to the lender that they will receive their money back, even if the borrower is unable to repay the loan. It can be a physical asset such as a house or an intangible asset such as a Fixed Deposit. 

To mitigate risk, banks and financial institutions request collateral. If a student fails to repay an education loan, the collateral is used to make up the difference. The lender has the right to seize the collateral if the borrower defaults on the loan.  

What is an Education Loan with Collateral?

An education loan with collateral is a loan that requires the borrower to provide collateral in the form of property, stocks, or other valuable assets. The collateral assures the lender that the money will be returned even if the borrower is unable to repay the loan. The loan is called a student Loan Against Property if real estate is used as collateral.  

If the borrower fails to make payments on the loan, the lender has the right to seize the collateral in order to recover their money. The collateral will be returned to the borrower if they make timely payments and repay the loan in full. 

The collateral for an education loan could be any asset owned by the borrower, such as a house, car, or other valuable property. For the most part, banks accept two categories of collateral as security for loans for international education. The loan amount is determined by the value of the collateral, and the borrower may receive a lower interest rate as a result of the collateral's added security. 

Education loans with collateral can be a good option for students who need to finance their education and have valuable assets that can be used as collateral. However, it is critical to carefully consider the loan's terms and conditions and ensure that the borrower is able to make the required payments in order to avoid defaulting on the loan and losing their collateral. 

Education Loans can be classified into two main types: 

• Unsecured Education Loans: Loans without collateral 
• Secured Education Loans: Loans with collateral 

An education loan without collateral and co-applicant is granted for loans up to Rs.4 Lakh. Security in the form of a third-party guarantee may be required for loans exceeding Rs.4 Lakh but less than Rs.7.5 Lakh. 

Also Read: Things to Check Before Taking a Loan Against Property for Education 

What are the various forms of collateral that lenders accept?

While real estate and automobiles are two of the most common forms of collateral, lenders may accept a variety of assets, such as savings accounts, investments, life insurance policies, and even future income. 

In general, lenders accept three types of collateral in a secured education loan: 

• Immovable Property: Lenders accept immovable property such as a standalone house, flat, or plot, as well as any non-agricultural land with a clearly defined boundary. Land for agriculture is not accepted as collateral. The property will be evaluated by a bank-appointed evaluator. All original property documents, such as a registered sale deed, approved plan or map, and link or chain documents, must be pledged as collateral. 
• Liquid Assets: Fixed Deposits (FD), Life Insurance Policies (LIC), and Government Bonds are examples of liquid assets. These assets are purchased at face value because they can be converted into cash immediately. Borrowers should keep in mind that their FD should be with the same bank from which they are taking the loan. The loan can be taken out on an existing FD or created from scratch. The FD holder will continue to earn interest on it as usual. A life insurance policy (LIC) should be a maturing policy with a fixed maturity date that can be pledged as collateral. 
• Third-party Collateral: If a borrower does not own collateral, they can pledge third-party collateral. Third-party collateral refers to the use of an asset owned by someone other than the borrower as collateral. In this case, the original collateral documents must be submitted. 

Also Read: Top Benefits of Loan Against Property Over Collateral-free Loans 

List of liquid securities for collateral education loan

As previously stated, you can also pledge liquid securities, which are preferred by lenders as a form of collateral security. Liquid securities can be instantly converted to cash, eliminating the legal and valuation processes and resulting in a faster loan process. The specific list of liquid securities that can be used as collateral for an education loan may vary depending on the lender and the country, but generally, some examples of liquid securities that can be used as collateral for an education loan include: 

• Fixed Deposits: In terms of liquid securities, FD has to be the most pledged type. For collateral education loans, lenders consider the FD principal value rather than the maturity value. Fixed Deposit loans range from 90% to 100%. 
• Insurance Policies: Lenders will accept LIC policies as collateral for education loans if they are term insurance policies. Few banks generally consider only LIC and bank-linked insurance companies, such as SBILife for State Bank of India. You can expect loans ranging from 75 to 100% of the surrender value of your insurance policies. The loan amount will be determined based on the surrender value of the policy. 
• Government Bonds: As collateral security, government security bonds issued by PSUs (Public Sector Units), NSCs (National Savings Certificates), and RBI relief bonds are accepted. You can borrow up to 100% of the face value of the bond. 
• Mutual Funds: Mutual funds can also be pledged as collateral security for education loans. The borrower can pledge their shares or mutual fund units with the lender to secure the loan. The value of the loan will be determined based on the value of the shares or mutual fund units. though only a few banks accept them. The process is also difficult and time-consuming, and banks only consider about half of the loan amount based on current market value. It is preferable to simply sell all of your shares and open an FD with the proceeds. 

Also Read: Factors Affecting Student Loans Against Property Interest Rates 

Features of an Education Loan with Collateral

Though the features of an education loan vary depending on the lender, we have listed some of the most common features of an education loan with collateral. 

• A collateralized education loan always requires the student to provide tangible or intangible security. 

• With all other parameters held constant, the interest rate on an education loan with collateral is always lower than the interest rate on an education loan without collateral. 

• Having a low income does not preclude you from receiving a loan, so income should not be regarded as a deterrent. 

• These education loans have a longer repayment period for applicants, such as prepayment or partial prepayment options without any prepayment penalties. 

• If a secured loan is obtained from a bank (public or private), the borrower and co-applicant are eligible for tax breaks under Chapter VI-A of Section 80E. This is also true for unsecured loans if they are obtained from a bank (and not an NBFC). 

Conclusion:

A student Loan Against Property keeping property as a collateral is a secure idea – especially if you are confident enough that you will be able to repay the loan and clear the lien on your property. A Loan Against Property EMI calculator maybe used to determine the actual amount that needs to be paid to the lender by the borrower. It is also wise to take a look at the Loan Against Property eligibility criteria before spending time on the loan logistics.