Why A Bank Would Decline An Education Loan With Collateral - Common Reasons

    Updated on: 27 Sep 2022

    Educational loan began as an incentive in 2001 for meritorious students looking to further their studies in professional and technical fields, but have no financial means to do so. 

    What began as a means of help by the Indian Banker's Association (IBA) soon began to be viewed by loan recipients as their right! Many didn’t repay the loans, leaving the banks with thousands of crores in unpaid debt. Unfortunately, current students have to bear the brunt of these non-repayments, as banks have become stricter while reviewing education loan requests.

    Check Your Education Loan Eligibility Apply Here

    Why Do Banks Reject Loan Application?

    • Low CIBIL Score - Low CIBIL score is one of the reasons why your education loan application can  get rejected because it shows that you have not repaid your previous loans or have delayed the payments. Since banks treat this negatively and anticipate deferment in the future, your loan application may be rejected on this ground.
    • Academic Performance - Banks reject loan applications of those with poor academic performance. This is because banks determine the employability of the  student on the basis of their academic performance among other factors, and therefore, poor academic records essentially imply less employability. This poses as a risk factor for the bank as there are higher chances of the student deferring the payment in the future. If your percentage in 10th, 12th or graduation is lower than 40%, then your loan application is likely to be rejected.
    • Unrecognized Education Institute - Education loan application, especially those for unsecured education loans, runs a higher risk of getting rejected if the institution of study applied for is unrecognised or not accredited. Lenders prefer to give loans for recognized/accredited/top ranking institutions and therefore conduct a thorough check on the university applied for. 
    • Unapproved Courses -  While assessing your loan application, banks always look for the course you have applied for. If it is a management, STEM, or medicine course, assuming you match all the other criteria, be assured that your application will be approved. This is mainly because courses in these fields imply assured employment with higher salaries which mean lesser  possibility of defaults from the applicant’s side. These are positive cases for the bank to take up. Correspondence, part-time, and distance learning courses are usually not considered viable for educational loans.
    • Incomplete or fake documentation of the student and the joint applicant: Incomplete or fake documents do not supply the required information which the banks need to assess and sanction the loan application. To ensure that your loan application is approved,you need to submit all the required documents which are authentic and provide the correct and complete information. However, there could be some loopholes in the documents which otherwise are completely avoidable but can lead to rejection of the loan application. In such cases, we propose solutions to fix those problems. 
    • No Admission Letter From The Recognized College/University - Bank does not sanction loan if the admission letter is absent. The admission letter is proof that you have got the admit from the university and will be pursuing the degree which you have taken the loan for. This proof is an assurance for the bank that the student will use the loan for studying. The admission letter should have details like yearly fees and expenses related boarding and lodging. 

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    Why Is An Educational Loan With Collateral Refused?

    One of the most common reasons for loan rejection and the one we are discussing here is the refusal of the loan due to the inadequacy of collateral. If you’re thinking that it is totally unintuitive for a bank to reject your loan request, especially when you provide collateral security - you’re not alone... we used to think the same until we dug deeper into collateral-related laws and regulations. Read on to find out why a with-collateral loan request might get rejected, and what you can do to increase your chances. 

    One common reason is that the offered collateral is an unconstructed land, which either falls under a Gram Panchayat’s jurisdiction or is agricultural land. The chances of your loan application getting rejected in such cases are very high.

    For An Urban Property Offered As Collateral, Banks Primarily Go Through The Following Key Questions - 

    • Is The Property Legal?
    • Is The Ownership Clear?
    • What Is The Value of the Property?

    What Property Documents Are Necessary To Apply For a Secured Loan? 

    Every Indian state has its own set of required documentation. All these documents have to be thoroughly reviewed by the bank. Any significant problem with them could lead to the loan application getting rejected.

    One document due to which loans get rejected quite frequently is the Occupancy Certificate, also known as Approved Map in some parts. It is a document issued by your local municipal authority that ratifies your property’s construction. In case you purchased the property from a builder, then the builder will have this document. In case you have misplaced this document, you can apply to retrieve it from the municipal authorities. This retrieval is usually a time-taking process, around two months at least, so, start early!

    To ensure that the property put up as collateral by you is not disputed, Banks ask for Link or Chain documents. These documents clarify the chain of ownership of the said property for the last 30 years. If you have owned the subject property for >= 30 years, then great - otherwise, you need to have a neatly arranged set of sale deeds tracing back the ownership for the last 30 years.

    Check Your Education Loan Eligibility Apply Here

    A common problem with link documents, or registration documents, is that a certain ownership transfer was established without proper documentation - something which is typical when the property gets transferred through inheritance. There are ways to rectify this, but such ways take several months to implement. If you are in such a situation, get in touch with a local property lawyer sooner than later.

    Or you can get in touch with GyanDhan. When you apply for a loan via GyanDhan, you are provided with a document checklist which we especially generate for you on the basis of your profile. Our document checklist generator tool has been made with extensive research, and it also factors in your area of residence because the collateral documents to be submitted for your loan application depends on where you live as well. To add to it, our doorstep document pickup service helps to accelerate the processing of the application as our Relationship Officers check the documents at your home to see if anything is missing or invalid. So you get the chance to resolve any document-related issues on the spot instead of going to the bank later. GyanDhan will also provide you with tips to fix the problem in your documents and suggest alternatives. You can 100% rely on our relationship officers since they have in-depth knowledge of the documents required.

    We hope this article pushes you to act early to gather the correct and relevant documents – so you can avoid facing rejection in your loan application.

    Shameless plug: We offers the best terms for with-collateral educational loans. You can check your eligibility and get more info on how to get an educational loan from SBI or other banks on our website. Not to mention, we also offer education loans without collateral!

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GyanDhan is India's first education financing marketplace.

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