Details of Security Offered in Education Loans

Higher education funding is a matter of concern for most Indian students who wish to study abroad. The purpose of an education loan is to ease this concern and provide the required financial aid so that students do not have to worry about their finances while studying abroad.

Among the two types of education loans, i.e., Collateral and Non-collateral education loans, a collateral education loan from any of the government banks is considered to be one of the best sources of finances. 

However, many students who apply for government bank education loans often find it difficult to get their education loan in time due to two factors: the slow processing time of a loan against property, and insufficient knowledge about the collateral security that can be pledged.

The various examples of collateral for a secured loan are explained well in the 12th episode of Loanflix Inshorts, which has been embedded below.

Before getting into the types of collateral security accepted for education loans, let us understand what is collateral security?

Collateral Security Meaning: Collateral security, also known as collateral property, is a banking term used to describe an asset(s) that borrowers provide as security to lenders in exchange for a loan. An education loan that is secured by collateral property is called a secured education loan. There are various properties an applicant can pledge as security, like a house, land, fixed deposits, etc.

In India, Lenders accept two types of collateral security for education loans; below are the details of the security offered in education loans.

• Immovable Security/Tangible Collateral Security: An immovable property or a tangible collateral security refers to a physical asset that a borrower pledges to the bank or lender as security for a loan. such as a house, flat, or non-agricultural land.
• Liquid security: Liquid security refers to fixed deposits, term insurance policies, and government bonds.

Banks also consider third-party collateral for education loans. Third-party collateral means collateral securities of your friends and relatives, where you can also pledge their property for your education loan, provided they are willing to offer their property as collateral.

To know how much loan amount you can get on collateral security? How are collateral securities valued? What documents are required, and more? We've already covered it in our detailed article on all about collateral education loans.

Out of the two aforementioned types of collateral security, immovable property is the more commonly pledged type of asset as collateral security for education loans. This is because when we think of collateral, we usually think of a house or land, and even bank officials mostly do not take up the burden of explaining everything. 

However, as earlier said, you can also pledge liquid securities, and it is a preferable form of collateral security for lenders. You can read our article on the education loan process and understand that immovable properties require legal and valuation reports, which take up valuable time. And, Liquid securities can be converted to cash instantly, thus eliminating the legal and valuation process, which results in a faster loan process. 

• Fixed Deposits- Again, in liquid securities, FD has to be the most pledged type of liquid security. Lenders consider the FD principal value and not the maturity value as the amount for collateral education loans. Lenders give 90-100% loans on Fixed Deposits.
• Insurance policies- Lenders also accept a LIC policy as collateral for education loans, provided it is a term insurance policy. Few banks generally consider insurance policies of only LIC and bank-linked insurance companies like SBILife for the State Bank of India. You can expect 75-100% loans on the surrender value of your insurance policies.
• Government bonds- Government security bonds issued by PSUs (Public Sector units), NSCs (National Savings certificates), and RBI relief bonds are accepted as collateral for education loan. You can get up to 100% loan on the face value of the bond.
• Mutual funds- Mutual funds can also be pledged as collateral security for education loans, albeit only a few banks actually accept them as security. The process is also daunting and time-consuming, plus banks consider only about 50% value for the loan amount as per the current market value. It is better to simply sell all your shares and open an FD from the returns instead. 

Though all properties mentioned below are suitable, lenders prefer certain properties over others based on the property's prospects.

• Urban properties over rural properties.
• Residential properties over commercial properties.
• Build up properties over empty lands.

As mentioned above, you can use your or third-party collateral property as security for an education loan, but there are certain limitations as to which all property can be pledged. There are a few types of properties that banks do not accept at all, which are listed below

• Agricultural lands are not accepted as collateral security for education loans because of the SARFAESI ACT of 2002.
• Non-agricultural lands without built-up boundaries are not accepted. A clear demarcation of land with a boundary of at least 2 feet high is required.
• Gram panchayat properties are not usually acceptable. Property has to be under the Municipal Corporation.
• Cantonment area property is not acceptable. It includes temporary quarters for troops and a permanent military station in India.

Important: Properties used for social causes, like a hospital, a school, etc, can not be pledged. 

We frequently receive inquiries from students and parents asking if they can pledge a property that is located in another city where they are not presently staying. Yes, you can pledge such collateral as security (provided it is acceptable). These cases are called Multi-city cases and are generally accepted by banks.

For example- "If  a student with their parents is staying in a rented house in Bangalore, and their immovable property (House) is in Kolkata, they can get the loan."

These Multi-city cases require bank branches to coordinate with each other. The processing centre/branch sends a request to the processing centre/branch nearest to the property's location.

Also Read: Getting education loan when collateral property is situated elsewhere

WeMakeScholars have handled multiple Multi-city cases and have successfully been able to get loans sanctioned for students who had previously been denied by banks. 

There are again region/ state-specific collateral requirements that students should know belonging to the particular region. We've covered the major cities and states for the same in this article- Education Loan on Property.

This is a frequently asked question by students who take out education loans on collateral security. 

Students may have this false notion that if they miss their one EMI, then the bank will seize their pledged collateral. But in reality, when you fail to repay an education loan, you get plenty of time and chances before the bank seizes and auctions the collateral.

We've addressed this question and explained it in detail like how to mitigate the risk of default, methods of recovery by public and private banks, etc. in this article- What happens if you do not pay back your Abroad Education Loan?

The financial team of WeMakeScholars is well-versed in the entire process and document requirements of various government banks. The assigned financial officers are dedicated to making a student’s education loan process easy and hassle-free from the very first day.

If our students happen to encounter any problem in their education loan process, be it regarding their documentation or pre-visa disbursement, their respective financial officer ensures that the problem is fixed before the day ends. 

And since we are funded and supported by the IT ministry, Government of India, we do not charge anything from the students.