If you approach any government bank for an abroad education loan, you almost certainly will hear of margin money or loan margin. 

So, what is margin money or loan margin in an education loan? If you are looking for the answer, then do not worry, this article will give you a clear idea about how loan margin works, how it is calculated, etc.

Or, you may also hear our education loan expert, Damini Mahajan give you a clear understanding of the loan margin concept and what exactly loan margin in education loan means, in the 14th episode of our web series, Loanflix

It is very common for students to misunderstand the concept of loan margin in education loans. More often than not, loan margin is something that is misinterpreted by students, and bank officials generally do not take the trouble of explaining how loan margin works. 

Must read: How are collaterals valued for an education loan?

What is Loan margin or margin money in an education loan?

A loan margin or margin money is the contribution brought by students toward their overall expenditures. With a minimum loan margin of 10%, public-sector banks are the most likely to follow it.

For eg., if a bank sets their loan margin at 10%, that means the education loan from the bank will cover 90% of your entire expenditures, and the rest of 10% is expected to be paid by you. You must first pay your share of the money to the banks, who will then transfer the funds to the students. 

Must read: Expenses Covered By An Education Loan in India For Study Abroad

How is loan margin calculated for education loans?

Most public banks set their loan margin at 10%. As mentioned before, this ideally means that the education loan from the bank will cater to 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 generally 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. However, the reality is something different. Many times, the applicants misunderstand the bank’s terms regarding margin money. How? Let’s understand this with the help of an example.

Let’s assume that you're an applicant and your total expenses amount to Rs.50 Lakhs. However, you approach the bank saying that you only need a loan of Rs. 30 Lakhs. Assuming that the minimum loan margin offered by the bank is 10%. When you ask for a loan of only Rs.30 lakhs, the bank is under the impression that you, the borrower, would 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. But most of the time, such students do not have the means to pay the remaining amount. This is one instance where there can be a misunderstanding between the bank and the student regarding margin money in education loans. Now let’s understand the general thought process of a student when he/she applies for an education loan.

Student’s thought process behind applying for only 60% of the total expenses

Let us try and understand why the student would have applied for only Rs.30 lakhs as an education loan, while his/her total expenses amount to Rs.50 lakhs.

Most students are under the impression that the total expenses mentioned on their admit cards/ I-20 are exaggerated and that they would get a part-time job and will be able to cater to the rest of their expenses. Hence, they only apply for the required amount as an education loan. Here’s how banks interpret this action from the loan applicant’s side.

What do banks generally think when students only apply for a small fraction of their total expenses as an education loan?

In the above scenario, when the student applies for Rs.30 Lakhs as an education loan, the bank assumes that he/she is capable of contributing the remaining Rs.20 lakhs out of Rs.50 Lakhs.

Since these Rs.20 lakhs constitute 40% of the total expenses, which is Rs.50 Lakhs, the bank raises its loan margin from 10% to 40% for this student. This means that, according to the bank, the student is expected to contribute this margin money proportionately, as and when the banks would disburse the loan amount. 

This is where a misunderstanding is more likely to happen between the students and the respective bank. The information gap about loan margin is the major cause of this confusion.

Now that you have read both, the student's and the bank’s views on margin money, let’s try and understand the exact process behind the loan margin calculation and how banks disburse the loan amount.

How does loan margin work in education loan?

When banks talk about margin money, their policies basically mean the following:

The percentage of loan margin in education loans is never fixed. The 10% margin money offered by most banks is the minimum loan margin. It means that your bank may increase or decrease your loan margin according to your total expenses and your collateral value, and this margin will not go below 10%.

Loan margin is calculated on the loan applicant’s total expenses and not on the loan amount. Moving further, let’s understand how loan amount disbursements for abroad education loans generally work. Consider the above example again.

In the example, the student’s total expense is Rs.50 lakhs and he/she has only applied for a loan of Rs.30 lakhs, which is 60% of the total expenses. Since the bank has set loan margin at 40% for this student, which is Rs.20 Lakhs, does it mean that the amount should reflect in the student’s account right away? No, the loan applicant doesn’t have to arrange for this money immediately. 

When you take an education loan, your bank mostly disburses the loan amount periodically as the students usually ask for disbursement every semester/ once for a year and then a second year later. This means that if you have applied for Rs.30 lakhs as a loan, this amount mostly needs not to be disbursed to your loan account all at once. 

The loan amount from the bank is proportionately disbursed to your loan account from time to time and the student is also supposed to pay his/her contribution out of the Rs.20 Lakhs simultaneously. i.e. As per the 40% margin, if you need 10 lacs disbursement, then the bank will ask you to put in 4 lacs first and then 6 lacs will be added by the bank, making it 10 lacs totally. 

Thus, for the above example, the loan amount from the bank, along with the margin money from the student’s side will be disbursed to the applicant’s loan account in a 60:40 ratio periodically (semester-wise/ year-wise).

The concept of margin money may be relatively difficult for you to grasp. Do feel free to reach out to our financial officers at WeMakeScholars to get the exact estimate of your margin money.

What does 0% loan margin mean?

A 0% loan margin is offered by private lenders on unsecured education loans. Furthermore, depending on specific criteria, certain public-sector banks provide a 0% loan margin on a secured education loan as well.

If the same student in the above example approaches a bank that offers a 0% loan margin, does it mean that his loan margin still remains at 0%? 

The answer is, that it will vary. If the student still applies for only 60% of the total expenses as loan amount, his/her loan margin will still be 40% and not 0% as per the bank’s policies regarding margin money.

Is it possible to reduce the loan margin for a collateral education loan?

So how does margin money work with respect to collateral-based abroad education loans?

Let’s assume that a student has applied for a collateral-based abroad education loan. His/her total expenses amount to Rs.50 Lakhs, and he/she applies for a loan of Rs.50 lakhs. However, the value of the collateral pledged by him/her only amounts to Rs.30 Lakhs. In this case, the student loan margin will again go up from 10% to 40%. Is it possible to decrease this margin?

These strategies can be used to bring down the margin money to even 0%. Since these strategies are the sole intellectual properties of WeMakeScholars, they cannot be shared publicly.

This information is exclusively given to students/loan applicants who apply for their abroad education loan exclusively through WeMakeScholars. So make sure that you request a callback today to discuss your abroad education loan plans.