Margin Money in Education Loan (2024)

Taking an education loan and embarking on an educational journey, especially one that takes you to the far corners of the globe, is a dream for many Indian students. However, the financial intricacies involved in realizing this dream can be daunting. Among these financial considerations, education loan margin money is a term that often leaves students and parents scratching their heads.

What is Margin Money?

When applying for an education loan, you may come across the term "margin money." But what is margin in loan mean? Simply put, margin money is the percentage of the total loan amount that the borrower needs to pay from their own pocket. Margin in education loan represents the portion of the total educational expense that the student or their family must contribute, making it the difference between the total cost of education and the loan amount sanctioned by the bank. Think of it as the financial "skin in the game" you need to secure the rest of the funding from the bank.

What is Margin in Loan Example?

Imagine Mr. X is planning to pursue higher education at a university in the United States, where the overall expenses for two years amount to INR 45 Lakh. Mr. X approaches GyanDhan for his education loan requirements (smart choice, right?) and gets a loan sanctioned for INR 30 Lakh.

In this scenario, Mr. X needs to arrange the remaining INR 15 Lakh himself. This INR 15 Lakh is the margin money. So, while the bank covers a significant portion of the education expenses (INR 30 Lakh), Mr. X has to contribute INR 15 Lakh from his own funds.

Here’s a simple breakdown:

Total education expenses: INR 45 Lakh

Loan sanctioned by the bank: INR 30 Lakh

Margin money (Mr. X’s contribution): INR 15 Lakh  

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What is Margin Money in Loan by Different Lenders?

When it comes to education loan margin money, various lenders such as public banks, private banks, and Non-Banking Financial Companies (NBFCs) have different requirements and specifications. Understanding the need for margin money involves looking at the practices of each type of lender. 

1. Public Banks

Public banks like SBI, UBI, and BOB typically provide education loans with collateral, meaning the borrower must pledge an asset against the loan amount. To ensure that the borrower is financially backed up and shares some responsibility, these banks do not cover 100% of the education expenses. Instead, they require the borrower to contribute a certain percentage of the total cost. This borrower’s contribution is what we refer to as margin money.

For example, if a public bank sanctions an education loan, it might cover 85% of the total expenses, leaving the remaining 15% to be covered by the borrower as margin money.

Margin Money of Banks and NBFCs

2. Private Banks & NBFCs

Private banks, such as ICICI Bank, Axis Bank, and IDFC First Bank, offer unsecured education loans. These banks often have pre-approved lists of universities and colleges. One of the significant advantages of taking an education loan from a private bank is that it covers 100% of the education expenses. This means there is no requirement for margin money from the borrower.

NBFCs like HDFC Credila, Avanse, Auxilo, and InCred also provide unsecured education loans. Unlike private banks, NBFCs do not have pre-approved lists of colleges or universities. However, they share the same benefit of covering 100% of the education expenses, eliminating the need for margin money.
 

While both private banks and NBFCs do not require margin money and cover 100% of the education expenses, they generally charge a slightly higher interest rate compared to public banks. This higher interest rate reflects the unsecured nature of the loans and the increased flexibility they offer.

How is Loan Margin Calculated for Education Loans?

Understanding how loan margin is calculated for education loans is crucial for effective financial planning. Margin money is the portion of the total education expense that a student or their family must contribute, while the remaining amount is covered by the loan.

Margin money is inversely proportional to overall expenses for a given loan amount, which means lower the overall expenses higher the margin money for a given loan-sanctioned amount. For students going to the US, when calculating EMI, banks typically double the amount mentioned in the I-20 letter which decreases the margin money for the students.

We realize that this is not a fair reflection because the living expenses in the I-20 form are always more than the actual (one of our team members studied abroad).
 

Banks have an upper limit on the % of overall expenses they are going to fund, which varies from 85% to 100% in the case of our partners. The remaining amount is what is required from the customer as the margin money. The number quoted by banks is the maximum limit of the expenses the bank will bear and the exact margin money depends on a case-to-case basis.

Let’s break it down with an example for clarity:

Scenario 1

Overall Education Expenses: INR 45 Lakh

Maximum Bank Funding: 85% of overall expenses

Maximum Loan Amount: 85% of INR 45 Lakh = INR 38.25 Lakh

Margin Money: 15% (because the bank covers 85% of the total expenses)

If Mr. X gets a loan sanctioned for INR 38.25 Lakh, he needs to contribute

Margin money: INR 45 Lakh - INR 38.25 Lakh = INR 6.75 Lakh (which is 15% of the total expenses)

Scenario 2

Overall Education Expenses: INR 45 Lakh

Loan Sanctioned: INR 30 Lakh

Margin money calculation:

Here, the margin money required would be calculated as follows:

Margin money: INR 45 Lakh - INR 30 Lakh = INR 15 Lakh

Margin money percentage: (INR 15 Lakh / INR 45 Lakh) * 100 = 33.3%

Watch the video to fully understand margin money in education loans

Features of Margin Money in Education Loan

If you are an aspiring candidate for higher education, it becomes vital for you to understand the concept and application of margin in education loans. Here are some crucial features of margin money that cannot be overlooked:
 

1. Student contribution - Margin money in education loans is the amount that students taking loans are required to pay for their education expenses of studying abroad. It represents the portion of the total educational cost that you need to fund from your own pocket.

2. Stepwise division - The education loan amount tends to be divided into different steps. The margin money is paid according to the requirements of the bank and the loan amount sanctioned. This division ensures that the student has a structured payment plan.
 

3. Variable percentage - The percentage given by the bank for margin money is quite variable. It can decrease or increase based on the loan amount you request and your capacity to pay the margin money. Banks assess each loan application individually to determine the appropriate margin percentage.
 

4. Zero margin money - Private banks provide education loans to students with 0% margin money. This means the bank covers 100% of the educational expenses, making it easier for students who may not have substantial funds available upfront.

Navigating the financial landscape of education loans can be challenging, especially when terms like margin money come into play. Understanding margin money is crucial as it determines the portion of educational expenses that you or your family need to cover, ensuring you are prepared for the financial commitment involved. Public banks generally require a certain percentage as margin money, reflecting a shared responsibility in funding education, while private banks and NBFCs offer the advantage of covering 100% of educational costs, albeit at higher interest rates.

At the end of the day, whether you choose a public bank, private bank, or NBFC for your education loan, the key is to understand the terms and plan accordingly. Adequate financial planning and awareness can turn your dream of studying abroad into reality without undue stress.

At GyanDhan, we understand these complexities and are dedicated to simplifying the education loan process for you. As India’s first education financing marketplace, we compare different education loans and help students secure the best education loan option. Whether you need assistance with securing a loan, understanding margin money, or planning your financial journey, GyanDhan is here to support you every step of the way. After all, your dream is our mission.

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