✓ Types of Valuation in Valuation Report
✓ How Immovable Properties are Valued
So you've done your research and discovered that a collateral education loan is comparatively better than a non-collateral education loan in terms of better interest rates, no-payment moratorium period, and other terms.
Now, the questions that must be racing through your mind are- how is collateral security valued, how do banks evaluate collateral, why do banks ask for collateral for education loans, etc?
According to news published on TOI in March 2021, NPAs (non-performing assets) or bad debt has risen to a new high, estimated at 9.7% of outstanding education loans at the end of Dec 2020. Because of this, education loan lenders are counting more on collateral or liquid assets to mitigate the risk (Especially Government banks).
Granted you already know that there are two types of collateral i.e Immovable properties and Liquid securities. We'll discuss them one by one in this article. Or you can also watch the 2nd episode of our LoanFlix series (season 2) which is embedded below-
In the context of an education loan, the collateral value is the amount that your lender considers for your pledged collateral for an education loan. The factors that may influence the value of your collateral could be the type of collateral, location of the property, how old is your property, and so on.
Evaluation of your property for education loan is done by bank-appointed evaluators who are engineers by profession. You would have to pay some 3-5K to the bank as a fee to the valuator.
As every property has its own intrinsic attributes, valuators determine the value of the property in real terms i.e. they analyze the potential growth of the property in the future. It involves the suitability of the location, site characteristics, how old the building is, and others.
While evaluating your property for an education loan, valuators usually go through the following process:
There are three values mentioned in a valuation report:
a. Fair Market Value
Here, they calculate the price of an asset that would sell in the open market. They analyze an asset’s fair market value that would represent the accurate value of the property or assessment of its worth.
For eg: If you can sell your property today at approx 1 crore and Government approved rate is about 90 lakhs, then the Fair market value will be about 95 lakhs. So, this is a decent value that a person can get.
b. Realizable Value
Realizable value is the net amount of money that you will get from selling one of your assets. Here, the value of the property or an asset is estimated to be less or high which means that the seller expects less cost or high cost while vending or selling an asset. It is generally 80% of Fair market value.
c. Deferred Value
The deferred value is the lowest possible value. Here, the value depends on the service that will be delivered sometime in the future. For eg: Earthquake. So the value drops down and they are generally 60% of the fair market value.
Most banks consider realizable value for their loan calculation. If the property value is more than 1 crore then two valuation reports are required.
The maximum any Government bank will give you is 100% of the realizable value but the general market scenario is about 70-80% of the realizable value to be approved as a loan.
When it comes to the valuation of fixed deposits there is no such legal and valuation procedure. Fixed deposits are liquid securities that can be converted to cash instantly. FD’s usually provide a fixed return i.e. the interest a person gets on the amount of investment. However, the value for the FDs is considered to be its principal amount.
For insurance policies, banks only consider term insurance policies. Few banks generally consider insurance policies of only LIC and bank-linked insurance companies like SBI Life for State Bank of India.
So, for the valuation of the insurance policy, one should get the surrender value certificate. It is the amount that the policyholder will receive if they decide to exit the policy before maturity. So, the insurance provider will offer you an education loan on the basis of how much amount you will get when you will discontinue the policy.
NOTE: If you are facing any trouble or any of the banks are declining to accept insurance policies as collateral, reach out to us on WeMakeScholars. Our team will help you resolve the concern.
Government bonds are usually calculated on the basis of coupon payments, or cash flow, and the bond’s value upon maturity. Most bonds like Nominal Treasury bonds (coupon or zero coupons), Inflation-linked Treasury bonds (long-term coupons), and Treasury bills (zero-coupon) are usually issued by the Government Debt Management. So, Government security bonds issued by PSUs (Public Sector units), NSCs (National Savings certificates), and RBI relief bonds are acceptable. A person can get a maximum 100% loan as per the face value or issue price of the bond.
Note: Many times, branches deny accepting Government bonds as collateral. Bank branches do not go through the bank instruction circulars properly and hence, have limited knowledge of the latest additions. But at WeMakeScholars, education loans are the only banking product we deal with. Hence, we establish that expertise in this domain. So, feel free to get in touch with your WeMakeScholars financial officer to discuss further on this.
Nowadays, mutual funds play an important role as they keep you invested in bonds and equities. Only a few banks accept mutual funds and shares. But, it is not an acceptable choice at all by any lender. A lot of other profile checks will be made very strictly if the collateral is mutual funds. So, it is preferable to sell your mutual funds and shares and create an FD instead.
Many times the bank will try to offer you an amount lower than your eligibility because you won’t understand their metrics. Therefore, it is very necessary to understand the metrics and have a clear idea of the valuation term and the loan amount on that. That’s why we always suggest you have a financial officer hand-holding you in the entire process.
To calculate the considerable amount on home loan property, different lenders use different formulae which we've covered in detail with examples for better understanding in this article- How to get education loans on home loan property?
You can also get in touch with one of our financial officers who will explain all the details of an education loan including the calculation of value of your property for an education loan.
What is collateral security, and why do I need it for my education loan?
Collateral security is an asset or property that is pledged as security or guarantee to the lender to secure the education loan. In case the borrower fails to repay the loan, the lender has the right to sell the collateral security to recover the outstanding loan amount. Collateral security is required for education loans to minimise the risk for the lender and ensure timely repayment of the loan.
How is the value of collateral security determined for my education loan?
The value of collateral security is determined based on the loan amount and the type of collateral security offered. Usually, lenders accept property, fixed deposits, and life insurance policies as collateral security. The value of the collateral security should be at least equal to the loan amount.
Can I offer a property owned by a third-party as collateral security for my education loan?
Yes, you can offer a property owned by a third-party as collateral security for your education loan, subject to certain conditions. The owner of the property should give a no-objection certificate (NOC) to the lender, and the property should be free from any legal disputes or encumbrances.
How does collateral security affect the interest rate on my education loan?
The collateral security offered can affect the interest rate on your education loan. If you offer a higher value of collateral security, the lender may offer a lower interest rate. However, the interest rate also depends on other factors like the loan amount, repayment period, and the borrower's creditworthiness.
Can I change the co-borrower for my education loan once it is sanctioned?
No, you cannot change the co-borrower for your education loan once it is sanctioned. The co-borrower is an integral part of the loan agreement and is responsible for repaying the loan in case the borrower defaults. If you want to change the co-borrower, you may have to apply for a new loan and go through the entire loan approval process again.