Secured Vs Unsecured Education Loan – Key Differences Explained

On getting started with their research on education loans, every student undoubtedly comes across these two terms: Secured and Unsecured Education Loans. Everyone already kind of has an idea of what a secured education loan and an unsecured education loan are. 

A secured loan is a loan that involves collateral, and an unsecured loan does not require any collateral. But there’s so much more to it than just that. There are many key differences, including the loan amounts offered, the interest rates, the eligibility, the documentation required, etc. So this article covers what secured and unsecured education loans are and the differences between them. 

Many students and their parents have questions like, “How is the collateral value calculated?”, “Who is the best lender to take a secured education loan from?”, “Who is the best lender to take an unsecured education loan from?”, “Which one is the best for me?”, “What is the Eligibility Criteria?”, etc. Keep reading to get answers to all of these questions and more. If you feel that we didn’t cover a topic in this article, reach out to us in the comment section. 

What is A Secured and An Unsecured Education Loan?

To know the answer, we first need to understand what an education loan is. An education loan is a funding provided by financial institutions, such as banks or NBFCs, for students to pursue their education, whether it's a bachelor's, master's, Ph.D., or any vocational course. The funding from an education loan can be used for your education in India as well as abroad.  

Types of Education Loans

Education loans are majorly classified into two types based on the collateral requirement: secured and unsecured education loans.

Secured Education Loan

A secured education loan or a collateral education loan is a loan that requires applicants to offer collateral as security. For education loans greater than INR 7.5 lakhs, most public banks ask applicants to pledge collateral as security for the loan amount. These loans offer higher amounts for lower interest rates.

• Secured education loans are known for offering lower interest rates.
• You can get relatively higher loan amounts in education loans with collateral.
• As there is collateral in the loan, the eligibility criteria are not as strict as non-collateral loans.

Unsecured Education Loan

An unsecured education loan, also known as a non-collateral education loan, doesn’t require any collateral or security. This means you can get an unsecured education loan without having to pledge any collateral as security. However, these loans are given based on the income and creditworthiness of the financial co-applicant.

• They can be processed way faster than secured education loans.
• Since there is no collateral involved, these loans typically require less documentation than secured loans.

Types of Collateral Accepted for an Education Loan

There are primarily two types of collateral accepted for education loans: immovable property and liquid security. Here’s a list:

Accepted Immovable property:

As the name suggests, these are the properties that typically cannot be moved from one location to another. They include:

• House
• Flat
• Non-agricultural land (With clear boundaries)

Liquid Security:

It refers to the assets that can easily be converted into cash quickly. Liquid assets accepted as collateral for education loans include:

• Fixed deposits
• Insurance policies (term insurance)
• Government bonds

How Is the Collateral Value Calculated?

Banks and financial institutions determine the collateral value by providing a valuation report for the collateral involved. It is prepared by a bank-approved civil engineer. This report quantifies the value of the property to be considered for the loan.

There are generally 3 values mentioned in the valuation report: Fair Market Value, Realizable Value, and Distressed Value. 

1. Fair Market Value:

   This represents the value the asset would fetch if sold in the current market today.

2. Realizable Value:

   The realizable value of a property is the expected selling price of the asset in the future after removing the costs of selling the property.

3. Distressed Value:

   It is the value of the property after considering all forms of depreciation possible to the property. The distressed value is generally calculated based on the loan repayment tenure, the property’s proximity to urban areas, the asset’s age, and the expected future market conditions.

The value of your collateral and the loan amount you are offered depend on these three factors.

Differences Between Secured and Unsecured Education Loans

In this section, we will examine and compare all aspects of secured and unsecured education loans, including Loan Amount, Interest Rate, Type of Interest, Moratorium period, Documentation, Processing time, and Embassy Acceptability.

Parameters	Secured Education Loan	Unsecured Education Loan
Loan Amount	Up to 1.5 Cr (For India) Up to 3 Cr (For Abroad)	Up to 1 Cr (For India) Up to 1 Cr (For Abroad)
Interest Rates	Starts from 8.15%	Starts from 10.5%
Type of Interest	No interest during the moratorium	Partial or simple interest during the moratorium period
Repayment duration	10 to 15 years	10 to 15 years
Moratorium Period	Course duration + 6 to 12 months	Course duration + 6 to 12 months
Documentation	Requires a lot of paperwork	Relatively less paperwork
Processing Time	Minimum 15-20 days*(working days)	7 working days*
Embassy Acceptability	All countries’ embassies accept secured loans as proof of funds.	A few countries do not accept unsecured loans as proof of funds for the student visa process.

*On going through with WeMakeScholars

As we can observe from the above table, a secured education loan is very flexible in terms of the loan amount, interest rate, and repayment period when compared to an unsecured education loan. However, it falls behind in terms of processing time and documentation requirements.

Lenders offering secured and Unsecured Education Loans

1. Public Sector Banks:

   Public sector banks like SBI, BOB, and Canara primarily provide secured education loans. They also offer unsecured education loans of up to ₹7.5 Lakhs under the CGFSEL Scheme. And you can get up to ₹50 lakhs through an unsecured education loan from SBI, depending on your university.

   Public banks typically offer the lowest interest rates compared to other lenders. Loan insurance is not mandatory in public banks, but SBI offers a 0.5% discount on the overall interest rate for those opting for SBI Rinn Raksha.

2. Private Sector Banks:

   Private-sector banks such as ICICI Bank, Axis Bank, and IDFC Bank offer both secured and unsecured education loans. However, they are more specialized in unsecured education loans. Nevertheless, private banks can offer relatively higher loan amounts for unsecured education loans. Loan insurance is mandatory in private banks.

3. NBFCs:

   NBFCs in India, like Credila, Avanse, Incred, and Auxilo, primarily provide unsecured education loans and tend to avoid secured education loans. They usually have higher interest rates compared to other lenders. And loan insurance is mandatory for obtaining an education loan through an NBFC.

4. International Lenders: 

   International lenders or foreign lenders are the private financial institutes outside of India, such as Mpower and Prodigy Finance, that primarily focus on providing education loans to international students. They can offer education loans without requiring a financial co-applicant and collateral. The lenders provide loans based on the student’s future earning potential. These loans are offered in foreign currency, so there will be no currency conversion charges.

Comparison of Lenders Providing Education Loans 

Choosing a lender for your education loan abroad depends on your specific requirements. Let’s understand how education loans from different lenders work from the table below to assist you in choosing a lender:

Parameter	Public Sector Bank	Private Banks	NBFCs	International Lenders
Maximum Loan Amount	Up to 3 Cr (Secured) Up to 50 lakhs (Unsecured)	Depends on the collateral amount (Secured) Up to 1 Cr (Unsecured)	Depends on the collateral amount (Secured) 80 lakhs (Unsecured)	Depends on the individual's profile and requirement (Unsecured)
Rate of Interest *	Starts from 8.15%	Starts from 9.99%	Starts from 10.5%	Starts from 11.5% USD
Processing Fee	10K + GST	0.5% to 1.5%	1% to 1.5%	2.5% to 5%
Repayment tenure	10 to 15 years	10 to 15 years	10 to 15 years	10 to 20 years
Processing time	15-20 working days	7 working days	7 working days	Depends on the application status and documentation.

*Click here to check the latest ROI 

Which is Better: Secured or Unsecured Education Loan? 

We will now address the question ‘which is better: secured or unsecured education loan?’. Well, there is no definitive answer to this question. As each individual has a unique situation, the best option for you largely depends on your situation.

However, there's no need to worry, as we will now explore the determining factors to consider for education loans from different lenders so that you can make an informed decision. The key determining factors include whether you have collateral to offer, the country you wish to study in, the earning capacity of your co-applicant, the field of study(STEM or non-STEM), and how quickly you need the loan sanctioned. 

Factors Determining Collateral Requirements For Education Loans

The following are several factors that you should consider when you’re pondering whether to obtain an unsecured or secured education loan. These factors can help you determine the most suitable loan for you, collateral or non-collateral.

1. Eligibility Criteria

The first thing to consider when choosing between these loans is the eligibility criteria. You need to understand how the eligibility criteria for secured and unsecured education loans differ to choose the best loan for your education. 

The eligibility criteria for an education loan, secured and unsecured, varies from lender to lender. Lenders will evaluate various aspects, including your past academic records, preferred course, and preferred country.

• Secured education loans have similar eligibility criteria to unsecured education loans but are less stringent.

• Secured loans can be more flexible with eligibility requirements because they have the safety net of collateral to mitigate risk in case the student becomes unable to repay the loan after the moratorium period.

2. Co-applicant Profile

Since unsecured education loans are offered based on the income and CIBIL score of the financial co-applicant, these are major criteria for private lenders.

A good co-applicant for an education loan is required to have:

• A good CIBIL Score
• An ITR or Form 16
• Income, or Business Proof
• A steady Income 
• Recent payslips and bank statement
• Financial co-applicants aged more than 60 years or nearing the retirement age are generally not accepted.

In contrast, secured education loans from public banks are less strict regarding the co-applicant’s profile, as collateral is involved in the loan. Even if your co-applicant doesn’t have a steady income or is retired, they can still qualify as your co-applicant. These requirements vary from lender to lender.  

*Note: Some lenders can waive the need for a financial co-applicant and offer unsecured education loans without a co-applicant and collateral when the applicant has substantial work experience and meets certain criteria of the lender.

3. Who can be your co-applicant?

• For Government banks: Parents, parents-in-law, siblings, parents' siblings, spouse, first cousins.
• For Private banks: Parents, parents-in-law, siblings, spouse, parents' siblings.
• For NBFCs: Parents, parents-in-law, siblings (preferably a brother over a sister), spouse, brother-in-law, parents' siblings, first cousins.

4. Documentation

• The documents required and the documentation time are way less for unsecured education loans, unlike collateral loans.

• For collateral education loans, you must submit all collateral-related documents, according to your lender. If you lack certain collateral documents, such as a "Property Title Deed," you would need to obtain them as soon as possible and submit them to the bank.

The documentation required to process an education loan can vary from one student to another. If you would like a personalized checklist, feel free to request a callback from us.

5. Processing time

• The processing time for a non-collateral education loan is typically about 7-10 working days once all documents are submitted. Since a student’s evaluation is based on their profile and fewer documents are involved, the loan processing time is relatively very short.

• In contrast, collateral education loans might take months for the complete loan process.

• Due to the involvement of collateral, you first need to provide all collateral-related papers.

• Later, the bank appoints a lawyer and an engineer to assess your pledged property before submitting the legal and valuation reports to the bank, making the process time-consuming.

6. Visa Requirements

When you are securing an education loan for studies abroad, you must also consider the visa requirements of the country you’re planning to study in. 

• Several countries, including Germany, Australia, Ireland, and New Zealand, have distinct visa conditions that require transferring one year of living expenses, tuition fees, or both, before applying for a student visa.
• And also, the embassies of countries such as Australia and New Zealand do not accept an unsecured education loan and third-party collateral education loan as a source of funds for the visa process. However, they all accept collateral education loans (except third-party collateral).

If you require assistance in selecting the right education loan for you, feel free to get in touch with our Financial Officers. They will thoroughly analyze your profile, help you choose the best lender, and manage your entire loan application, all at no cost. Since WeMakeScholars is an organization funded and supported by the Ministry of Electronics and IT, Government of India, we provide all our services free of charge to students.

Conclusion

Choosing between a secured and unsecured education loan for your studies abroad can be a complex decision. Understanding the various education loan providers and comparing their terms is essential in choosing the right option for you.

In this article, we’ve explored several key factors to consider regarding collateral and non-collateral education loans. Also covered the differences between the two loans and provided a comparison of different lenders providing education loans, to assist you in selecting the most suitable option for your education.

If you still have any doubts or want a smooth and stress-free loan process for your education, feel free to request a callback from WeMakeScholars. Our team can help you get the best loan option for your studies in India or abroad and manage your entire loan process so that you can have a hassle-free education journey.