If you are in the practice of applying for an abroad education loan or have already applied for one, you must be familiar with the term ‘margin money’ or ‘Loan margin’. What is margin money in an education loans? Do you know what the meaning of this term is? This blog will give you a clear idea about how loan margin works, how it can be calculated, etc.
It is very common for a beginner to misunderstand the concept of loan margin in education loans. However, since margin money is important to the process, it is extremely crucial for you to be well aware of these basic concepts. This is because more often than not, margin money is something that is misunderstood by students and no one takes the trouble of explaining how loan margin works.
What is margin money?
The margin money can be represented as the percentage of money contributed by the applicant towards his total expenses. It is also explained as the ratio of the total loan amount to the total expenses.
When you contact a bank for an abroad education loan, most of the time, they do not provide 100% finance for your total expenses. Instead, they expect you, the applicant, to give a certain percentage of money towards your total expenses.
For instance, when a public bank like SBI claims that their loan margin is 10%, what they mean to convey is that the education loan will finance 90% of your total expenses. The remaining 10% of the amount will have to be contributed by you. This 10% is your loan margin.
To understand this concept better, let’s assume that your total expenses amount to Rs.10 Lakhs. In this case, the bank will contribute 90% of the amount, which is Rs.9 Lakhs, and the remaining Rs.1 Lakh which is 10% of your total expenses, has to be paid by you. This Rs.1 Lakh is your margin money.
How to calculate margin money?
Most of the public banks set their loan margin at 10%. As mentioned before, this ideally means that the education loan from the bank will cater for 90% of your total expenses.
So, if your total expenses come up to Rs.50 lakhs, and you apply for a loan of Rs.50 Lakhs, the education loan from the bank will cater for Rs.45 Lakhs, which constitutes 90% of your total expenses. The bank expects you, the applicant, to pay the remaining amount of Rs.5 lakhs which constitutes 10% of your total expenses.
This is how banks typically calculate the margin money. The above scenario is an ideal case, where you apply for a loan amount that is almost the same as your total expenses.
Let’s understand this with the help of an example.
Let’s assume that you are an applicant and your total expenses are Rs.50 Lakhs. However, you approach the bank saying that you only need a loan of Rs. 30 Lakhs. Let’s assume the minimum loan margin offered by the bank to be 10%.
Now, when you ask for a loan of only Rs.30 lakhs, the bank is under the impression that you will be paying the remaining Rs.20 lakhs out of the total expenses of Rs.50 Lakhs. There is no scope for any confusion regarding the margin money if you are capable of paying the remaining amount.
Let’s take another example that if a student may seek a Rs. 1 crore secured education loan from the bank and may have property worth Rs. 1 crore to keep as collateral. However, the bank may, in return for the collateral, provide an education loan equal to 90% of the value of that property. that is Rs 90 Lakhs instead of Rs. 1 Crore. The remaining 10% of margin money has to be borne by the student himself.
For the lending institution to release the amount of Rs. 90 lakhs, the student has to show that he has Rs. 10 lakh in his or her account at the time of disbursement of Rs 90 lakhs. This amount of Rs. 10 lakh is considered as margin money. The margin money need not necessarily be the amount that the student puts in the account from his or her pocket. Students can also use the education grants or scholarships that they have received to meet the margin money requirement.
FAQs
1.What is margin money on education loan?
Margin money is a certain part of the total cost of education the borrower of the loan is required to bring to the table themselves. The rest of the amount is then given by the bank as part of the education loan. The percentage of margin money can differ on the basis of banks, universities, loan amounts, etc.
2.How is education loan margin calculated?
The percentage of margin on an education loan can be calculated using the following formula: {1-(sanctioned loan amount/overall expenses)*100}. For instance; if the overall expenses are 40 lakhs, the sanctioned loan amount is 33 lakhs. The margin percentage will be 17.5% i,e; the borrower will have to fund the remaining 7 lakhs himself.
3.Why is margin money calculated on education loan?
The margin money on an education loan acts as a sign of trust between the lender and borrower. By paying a certain amount of the total cost, the borrower cements their credibility in the eyes of the lender that they will not default on their repayments of the loan.
4.What are the benefits of margin money on education loan?
The main benefit of margin money on an education loan is the trust that is established between the borrower and the lender. The certain percentage that is paid by the borrower acts as a guarantee that they will repay their loan to the lender.
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