Students looking to pursue their higher education are often faced with financial challenges. Eligible applicants enjoy scholarship awards, but these are limited, and the rest have to find other means to finance their studies. Student loans are the best second option. However, they differ in structure. There are two significant types of student loans: secured (education loan with collateral) and unsecured (education loan without collateral). This article explains the various types of collateral and which ones are acceptable for reasonable loan amounts.
Types Of Collateral That Will Be Accepted
Borrowers can use three major types of collateral security to obtain a student loan from a bank.
- Tangible/immovable assets – real estate is the most common tangible asset for obtaining student loans. Lenders accept houses, flats, plots of land, and non-farm open property with solid borders. However, they don’t take land within range of the local Gram Panchayat or farmland.
- Intangible assets – liquid investments like mutual funds, life insurance plans, fixed deposits, ULIPS, and government bonds are intangible assets that can qualify as collateral. However, fixed deposit account holders will earn the interest and not the bank during the loan period.
- Third-party secured education loan – in some rare cases, lenders can accept tangible assets from third parties (relatives, spouses, or friends) as collateral.
Liquid Securities Under Types Of Collateral Loan
Among the different types of collateral, tangible assets are the most commonly pledged for loans. This is because of the norm of security being a house or land. However, immovable securities require legal and value assessments to determine the exact worth of the property. In that regard, banks prefer liquid securities, which can rapidly be converted to cash, thus shortening the lending process.
Government Securities Under Types Of Collateral Loan
Government security bonds issued by RBI relief bonds, NSCs, and PSUs are acceptable as collateral securities. You can borrow as much as the bond’s total face value.
- Fixed deposits – this is the most pledged liquid security. Lenders assess the principal value and not the maturity value of the fixed deposit to process school loans. FDs qualify for 90%-100% of loan applications.
- Mutual funds – although acceptable, very few banks in India accept mutual funds as collateral for student loans. They are time-consuming and tedious; thus, banks evaluate approximately 50% of current market value to determine loan amounts.
- LIC policy – provided they are term insurance policies, banks can accept LIC policies. State Bank of India is among the few banks that evaluate bank-affiliated insurance businesses and LIC insurance plans. You can borrow 100% of the surrender value of your insurance products.
What Is Collateral For Student Loans?
Collateral, also called loan security, is an asset pledged to obtain a student loan. Collateral is usually tabled in exchange for financing. These securities can be physical assets or on paper. Public and private banks typically give unsecured loans of up to INR 7.5 lakhs. NBFCs also have their share of terms on the types of education loans. However, amounts more than would require collateral to ensure the back can recover their amount or a percentage of that when a borrower defaults the loan. Secured loans with security often attract amounts reflecting the asset’s value, have lower interest rates, and have favourable terms.
| Financial institutions issuing secured loans | Loan amount | Interest rates |
| Public banks | Up to INR 2 Cr. | 9.40% – 10.90% |
| Private banks | Up to INR 80 Lakh | 11% – 12.75% |
| NBFCs | Up to INR 80 Lakh | 12% – 14% |
Collaterals Not Accepted By Banks
There are various types of collateral security for education loans that banks don’t accept. This might be due to their value, accessibility, legality, or evaluation procedure. Lenders generally only take immovable properties like agricultural land and open land with boundaries as collateral security for student loans. It’s important to check in with your lender to know what insurance in an education loan they don’t accept.
What If The Collateral Is Not Located In The Same City?
A property that meets the eligibility criteria to qualify for a student loan will be used by a bank regardless of the location. If the property is located in a different city than you live and you are applying for the loan, the bank handling the paperwork can liaise with the branch in that city to process the loan request. These instances are referred to as multi-city cases, and most banks approve them.
What Happens To Your Security If You Fail To Repay Your Education Loan?
This shared concern often puzzles many students. It takes more than a single missed EMI payment to result in the seizure of your pledged property. However, banks are considerate and will track your repayment records before making a decision. They further give borrowers ample opportunities and span to settle the scores before taking possession of the collateral security.
Documents Required For Collateral-Based Loans
Documentation requested by banks for the types of collateral for secured loans differs depending on factors such as property time, location, and purchase history. Generally, below are the most common documents required:
- Registered sale deed
- Most recent property tax receipts
- Occupancy proof
- Property title deed
- Original registration receipt
- Allotment letter by an authorized govt/municipal corporation
- Previous chain of sale deed establishing title.
- Most recent property electricity and tax bills have identical addresses.
- Approved map/plan for built/constructed properties.
- Link and chain documents for proof of ownership history for the last 30 years
Additional Documents When Applying For An Education Loan With A Property
Different cities have varying additional requirements when applying for a student loan with property. Furthermore, the document requirement might differ from one lender to another.
- Mumbai & Pune – NA order, NOC from society/a builder, Letter of allotment, NOC and transfer letter for CIDCO/MHADA property, Urban land ceiling order, Share certificate, and Conveyance deed of society.
- Bengaluru – RTC (Record of tenancy certificate), Encumbrance certificate, Conversion order (from agriculture to residential), and Property tax receipt
- Hyderabad – Urban land ceiling certificate, Encumbrance certificate, and NA certificate & 7/12 extract (if not available in the sale deed)
Benefits Of Types Of Collateral Loan
Unlike unsecured loans, secured loan pledges with either of the different types of collateral have many benefits. The lenders prefer these loans as they have insurance if the borrower can’t pay back. It also makes it easy for lenders to estimate the amounts and possible repayment capacity. The benefits include:
- Lower interest rates
- Flexible repayment terms
- Higher loan amounts
- Easier approval
Why Should You Apply Early For A Loan With Collateral?
Student loan applications with security should be made early enough for various reasons. This is subjective to the different types of collateral and their characteristics. Early application is necessary to get your funds in time before admission to a college/university because:
- Lenders need time to crosscheck and verify the genuineness of the documents presented for collateral security
- Lenders need to inspect and evaluate the property to determine its worth to calculate the possible loan amount
Please correct the records to avoid an extended processing time or loan application rejection.
FAQs
Q1. What Type Of Collateral Is Used For Education Loans?
There are three types of collateral security for education loans: tangible assets, intangible assets, and third-party tangible assets.
Q2. What Are The Types Of Loans For Studying Abroad?
There are two types of student loans for international students: secure and unsecured education loans.
Q3. What Is The Collateral Value Of An Education Loan?
This is the amount of educational loan a lender considers for the pledged collateral.
Q4. Do Banks Accept Collateral From Only The Immediate Family?
Banks consider immediate family only for third-party tangible assets as collateral for student loans.
Q5. Can I Sell My Collateral Property Before Repaying My Loan?
You can only sell an asset pledged as collateral once the loan is fully paid.
Q6. Can I Pledge Something Else As Security Other Than Property?
Yes, you can pledge liquid and government securities as collateral.
Q7. What Is The Minimum Value Of The Collateral For Abroad Education Loans?
The minimum value of a pledged collateral should equal or exceed the requested loan amount.
Q8. Do All Banks Require Collateral For An Abroad Education Loan?
Collateral security is not mandatory for all student loans.
Q9. Can My Home Serve As Collateral For An Abroad Education Loan?
Yes. It falls under tangible assets.
Q10. Can Investments Or Financial Assets Serve As Collateral?
Yes. Whether they qualify as liquid or government securities.
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