Types Of Collateral Security For Education Loan
Education Loan

Types of Collateral Security for an Abroad Education Loan

Types of Collateral Security for an Abroad Education Loan

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Know the various types of collateral that can help secure your education loan. Learn different types of collateral and conditions to get your education loan with ease.

GyanDhan

Ananya Ghai

Updated on: 10 Oct 2023
collateral security for education loan


Collateral refers to an asset or property that a borrower pledges to a lender as security for a loan. It serves as a form of protection for the lender in case the borrower defaults on the loan or fails to fulfil their obligations. 

When obtaining a loan, the lender may require collateral to mitigate the risk associated with lending money. If the borrower is unable to repay the loan, the lender can seize the collateral and sell it to recover the outstanding balance. A loan where security is required is termed a secured loan.


A secured loan is easier to get sanctioned, as the bank views the collateral as a security that can be used in case the borrower fails to repay the loan or the loan becomes a Non - Performing Asset (NPA). In the case of a secured loan, (loan with collateral) the loan amount sanctioned depends on the value of the collateral that is pledged with the loan. 

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Key features of education loans with collateral

Description Public banks Private banks NBFCs

Loan amount

Up to INR 2 Cr.

Up to INR 80 Lakh

Up to INR 80 Lakh

Interest rates

9.40% - 10.90%

11% - 12.75%

12% - 14%

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Different types of collateral security

Borrowers can basically pledge two types of collateral, when applying for a secured education loan. They are as follows:

  1. list items Tangible assets:  

Tangible assets include real estate assets such as houses, flats, etc. Kindly note that agricultural land or land that falls under the jurisdiction of gram panchayat is not accepted as collateral by lenders. However, non-agricultural open land that has clear boundaries is accepted as collateral for secured education loans.

  • list items Intangible assets:  

Intangible assets include liquid securities such as fixed deposits, mutual funds, ULIPs, Life Insurance policies, government bonds, etc. Borrowers can pledge an old or open a new fixed deposit for an education loan. However, the fixed deposit holder will continue to get any interest received on these intangible assets.

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Collaterals accepted by banks

Banks generally accept the following types of collateral for an abroad education loan.

  • list items Residential property
  • list items Fixed deposits
  • list items Government bonds
  • list items Insurance policies
  • list items Open land with boundaries
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Collaterals not accepted by banks

Lenders generally do not accept the following immovable properties:

  • list items Agricultural land
  • list items Open land without boundaries
  • list items In Telangana: Notary registered property
  • list items In Karnataka: B Khata property
  • list items In Delhi: GPA or leasehold properties  


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What if the collateral is not located in the same city?

If the property you want to pledge fulfills the bank's eligibility criteria then you can use it as collateral. Using a collateral that is not located in the city you live is possible and such instances are commonly referred to as Multi-city cases and are typically approved by most banks. 

To pledge an asset located in a different city, require bank branches to coordinate with each other. The branch handling the paperwork sends a request to the branch nearest to where the property is located.

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What happens to your collateral if you fail to repay your education loan? 

This is a common concern among students who have secured their education loans with collateral. There is often a misconception that missing a single EMI payment will lead to the immediate seizure of pledged collateral. However, that is not true. Banks provide borrowers with ample time and opportunities before actually taking possession of the collateral. 

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Documents required for a collateral based loans

The list of documents required for collateral, depends on several factors, primarily: property type, purchase history, and location. Broadly, the following documents are required:

Common documents:

  • list items Registered sale deed
  • list items Approved plan or map of the constructed property
  • list items Chain documents, evidencing the ownership history of the property for the last 30 years.
  • list items Latest property tax receipt.
  • list items Occupancy proof
  • list items Property title deed 
  • list items Original registration receipt for the above agreement 
  • list items Allotment letter by the municipal corporation/authorized govt. authority such as MHADA, CIDCO, HUDA, DDA, JDA, GIDC, etc 
  • list items Previous chain of sale deed establishing title. 
  • list items Most recent property tax bills or electricity bills having the same address. 
  • list items Approved plan/map if the property being pledged is a built one.
  • list items Link documents that prove the ownership history of the said property for the previous 30 years.
  • list items A latest property tax receipt  

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Additional documents if you’re applying for an education loan with a property in the following cities:

Mumbai or Pune

  • list items NA order
  • list items Urban land ceiling order
  • list items NOC from a builder or society
  • list items Share certificate
  • list items Letter of allotment
  • list items Conveyance deed of society
  • list items If CIDCO / MHADA property: NOC and transfer letter


Hyderabad

  • list items Urban land ceiling certificate
  • list items NA certificate, if not included in the sale deed
  • list items 7/12 extract, if not included in the sale deed
  • list items Encumbrance certificate

Bengaluru

  • list items RTC (Record of tenancy certificate)
  • list items Conversion order (from agriculture to residential)
  • list items Khata certificate ( A or B )
  • list items Property tax receipt
  • list items Encumbrance certificate

Note: There can be additional documents required depending upon the city from where the loan application is made. Also, the list of documents required varies from one lender to another.
 

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Benefits of collateral based loans

Collateral based loans or secured education loans require the borrower to pledge an asset as security for the loan. This collateral provides assurance to the lender that they can recover their funds even if the borrower defaults on the loan. This type of loan comes with a bunch of benefits.

  • list items Lower interest rates: One of the primary benefits of secured education loans is that they typically come with lower interest rates compared to unsecured loans. Lenders are willing to offer lower rates because the collateral reduces their risk.
  • list items Higher loan amounts: Secured loans often allow borrowers to access higher loan amounts since the collateral's value can be substantial. This can be particularly useful for expensive education programs abroad.
  • list items Flexible repayment terms: Lenders may offer more flexible repayment terms, including longer tenures, which can help borrowers manage their loan repayments comfortably.
  • list items Easier approval: Secured loans are generally easier to secure for individuals with limited credit history or lower credit scores because the collateral acts as security.
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Why should you apply early for a loan with collateral?

A word of caution for those who are planning to apply for an education loan with collateral. Make sure that you have sufficient time in hand when applying for such a loan. This is because secured loans take a longer time to get sanctioned because - 

  • list items The bank needs to verify and cross-check all the documents related to the collateral being pledged. 
  • list items Missing or wrong documents may lead to rejection of loan applications or more processing time.
  • list items Bank conducts a property evaluation. 

The best way to cross the above-said hurdles is by applying early so that you have sufficient time to collect and submit the documents while the bank also has enough time to verify the collateral documents. 

When seeking an abroad education loan, understanding the various collateral security options available is crucial. Ultimately, collateral security can help you secure the funding you need to pursue your dreams of studying abroad, but it's essential to manage it responsibly to avoid potential risks.

To ease the process, you can start your journey with GyanDhan. When you apply via GyanDhan, the evaluation of the property and legal report will be done in advance so that it reduces the time later on. The valuation or legal report has a validity period between three months to three years, so getting it done earlier would only benefit the applicant in the quick processing of their education loan application. To start your abroad education loan journey with GyanDhan, all you need to do is check your education loan eligibility here. 
 

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Frequently asked questions

Do lenders accept collateral from only the immediate family?

Lenders typically accept third - party collateral. Lenders do not necessarily limit collateral acceptance to assets provided by immediate family members. Collateral can come from various sources and may include assets from individuals beyond your immediate family. The acceptability of collateral often depends on the loan amount required and the value of the collateral. 

Can I sell my property before repaying my loan?

Selling the pledged asset before fully repaying the education loan is not allowed. The asset serves as collateral until the loan is completely paid off. If you do sell the asset prior to repaying the loan, the lender retains the right to take possession of the asset and sell it to recover the outstanding loan amount.

Can I pledge something else as collateral other than property?

Yes, you can pledge other assets as collateral for an education loan, such as fixed deposits, mutual funds, life insurance policies, or gold. 

What should be the minimum value of the collateral for abroad education loans?

The minimum value of the collateral should be equal to or more than the loan amount required. Lenders typically assess the loan amount based on the current market value of the collateral security provided. 

Do all lenders require collateral for an abroad education loan?

Collateral is not a mandatory requirement for all education loans. Some lenders provide unsecured education loans to eligible borrowers with favorable credit histories. However, unsecured education loans typically come with higher interest rates compared to secured loans.

Can I use my home as collateral for an abroad education loan?

Yes, banks accept residential properties as collateral for loans. Home equity loans and mortgages are examples of loans where the property serves as collateral. However, keep in mind that the value of the property and the loan-to-value ratio will play a role in determining the loan amount.

Can I use investments or financial assets as collateral?

Yes, many banks accept investments and financial assets such as stocks, bonds, or mutual funds as collateral. However, the acceptability and valuation of these assets may vary among banks, and there may be restrictions on the type and liquidity of the investments.

Do banks accept co-signed loans as collateral?

No, co-signed loans typically involve a guarantor who is legally responsible for the loan if the borrower defaults. The collateral, in this case, belongs to the borrower and not the co-signer.

Can I use personal possessions like jewellery as collateral for taking an education loan?

Some banks accept valuable possessions like jewellery or artwork as collateral, but it depends on the individual bank's policies. The value and authenticity of the possessions may need to be assessed by experts appointed by the bank.

What is the difference between valuation and verification of collateral security?

Verification in collateral security confirms the existence and accuracy of collateral-related details. Valuation, on the other hand, determines the financial worth of the collateral. While verification validates collateral, valuation assesses its monetary value. Both processes are crucial for evaluating the adequacy and reliability of collateral security.

Is fixed deposit a tangible or intangible asset?

A fixed deposit is an intangible financial asset. It does not have physical form but represents a contractual agreement between an individual or organization and a financial institution. The fixed deposit represents a legal claim to a specific amount of money that has been deposited for a fixed period, earning a predetermined interest rate. Although intangible, fixed deposits provide a secure and reliable investment option for individuals looking to grow their savings.

What is the difference between a pledge and a mortgage?

Pledge and mortgage are two distinct legal terms that refer to different types of security interests in property. 

  • list items Pledge: A pledge is a type of security interest where a borrower pledges personal property as collateral for a debt or loan. 
  • list items Mortgage: A mortgage, on the other hand, is a type of security interest specifically related to real estate.