There are 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.
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.
| Particulars | Collateral | Non-Collateral |
| Cost of loan | 7-9% per annum | 11-14% per annum |
| How much loan can you get | Up to 90% of collateral value, can even go up to Rs. 1.5 cr | Usually limited to Rs.50 lakhs |
| Tenure of Repayment | Up to 15 years | Limited to 10 years |
| Repayment period | Usually after 1 year, of course, completion/start of the job | After 6 months of job completion, immaterial whether the student has got a job |
| Flexibility | The interim grace period before the loan is to be repaid can be extended on request if the student is unable to find employment | The interim grace period before the loan is to be repaid can be extended on request if the student is unable to find employment |
| Documentation | Extensive paperwork, with a confirmation of admission to the institute of your choice | Minimal paperwork and admission confirmation required |
| Processing fees | A percentage of the loan amount | A percentage of the loan amount, but these can be negotiated |
| Processing time | Anywhere from 30 to 45 days depending on the documents submitted. The due diligence done to verify the ownership of the collateral is quite stringent | 10-15 days if all your documents are in order: admission confirmation, the credit history of co-borrowers, credit scores, etc |
| What can be offered as collateral | Property with no liabilities, fixed deposits, stocks, bonds, etc | – |
Both collateral v/s non-collateral loans have much to offer the customer.
While on paper, a collateral loan definitely makes a lot of financial sense, everyone may not be able to manage the collateral of large properties 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 soon the possible.
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.
FAQs
What is the main difference between collateral and non-collateral education loans?
The primary difference is that collateral education loans require an asset as security, while non-collateral loans don’t require any asset. Collateral loans may offer lower interest rates, while non-collateral loans are unsecured.
What assets can be used as collateral for education loans?
Common assets used as collateral include property, investments, or even a vehicle. The exact types of assets accepted can vary between lenders.
Do non-collateral education loans have higher interest rates?
Non-collateral education loans often come with higher interest rates because they carry more risk for the lender, as there’s no collateral to secure the loan.
Are there any advantages to taking a collateral education loan?
Yes, collateral education loans typically offer lower interest rates, higher loan amounts, and may be easier to qualify for, especially if you have valuable assets to pledge.
Can I switch from a non-collateral to a collateral education loan later on?
It may be possible to refinance or convert your non-collateral education loan into a collateral loan if you have assets to pledge, but the terms and feasibility will depend on your lender’s policies.
