collateral vs non collateral

Collateral vs. non-collateral education loans

There is collateral vs non-collateral education loans in India. If you have decided to take a loan to fund your child’s further studies securing one is important to advance your child’s future.

As you do your research and try to figure out which loan is better for your child, it is important for you to keep several parameters related to collateral in mind

What is a collateral education loan?

Collateral is typically property that you give to the lending bank as security against the loan you are taking. The larger the education loan, the greater has to be the value of the collateral.

This works as a reassurance to the bank in case the borrower is unable to repay the loan.

Collateral vs Non Collateral India

What is a non-collateral education loan?

When the lender issues an education loan without any security, it is known as a non-collateral loan. In this kind of loan, the bank considers the student’s academic track record and the financial track record of the co-borrowers.

Now a lot of parents debate over which of these is a better loan format. The fact is both types of loans serve a purpose.

As a co-borrower, you will need to analyze the features of both loan types and choose the one that works better for your situation.

ParticularsCollateralNon-Collateral
Cost of loan7-9% per annum11-14% per annum
How much loan can you getUp to 90% of collateral value, can even go up to Rs. 1.5 crUsually limited to
Rs.50 lakhs
Tenure of RepaymentUp to 15 yearsLimited to 10 years
Repayment periodUsually after 1 year, of course, completion/start of the jobAfter 6 months of job completion, immaterial whether the student has got a job
FlexibilityThe interim grace period before the loan is to be repaid can be extended on request if the student is unable to find employmentThe interim grace period before the loan is to be repaid can be extended on request if the student is unable to find employment
DocumentationExtensive paperwork, with a confirmation of admission to the institute of your choiceMinimal paperwork, admission confirmation required
Processing feesA percentage of the loan amountA percentage of the loan amount, but these can be negotiated
Processing timeAnywhere from 30 to 45 days depending on the documents submitted. The due diligence done to verify the ownership of the collateral is quite stringent10-15 days if all your documents are in order: admission confirmation, the credit history of co-borrowers, credit scores, etc
What can be offered as collateralProperty with no liabilities, fixed deposits, stocks, bonds, etc

Additional read: Tips to arrange study abroad funding

Both collateral v/s non-collateral loans have much to offer the customer.

And while on paper, a collateral loan definitely makes a lot of financial sense, everyone may not be able to manage the collateral of large property or other instruments that the bank may require as security.

So it helps to review all the options in the market and pick the one that works best for your specific situation.

Whether you opt for one or the other, there are a few thumb rules you absolutely must keep in mind when applying for an education loan.

 If you have plans to take an education loan to fund your child’s higher studies, start saving from the early years. Borrowing money should be your backup for the shortfall in your funds.

Do not make overseas education plans with the money you can borrow. Financial conditions can change at any point in time, and having your own funds will give you the confidence you need to guide your child to the career option of their own choice.

Once you have taken an education loan, your priority should be to save money and pay back the amount as the earliest.

Interest rates and rising inflation rates make the amount of your loan repayment variable, and it is easy to get stuck in the debt trap if you do not have a clear repayment strategy.

Help your child enter the adult world with as little debt as possible and encourage good financial discipline from the early days. This will stand him/her in good stead in adult years.

Last but not least, once you have identified the loan that works for you, do due diligence, read the small print, ask questions and then go ahead and take it.

Let this loan be just the stepping stone to a great life that is planned for your child as he/she steps into a whole new world of global studies and learning. 

Do not let a lack of funds hold your child back. With a little planning and discipline, you will find several tips to plan your finances well and secure a future for your child’s higher education.

Consult an expert advisor to get the right plan

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