Secured Vs. Unsecured Education Loans: What's the Difference

    Updated on: 16 Jan 2023

    The stamp of a foreign university and the exposure gained by it are unparalleled. Both act as a trampoline for your career. They give you a jumpstart only a few Indian schools can. No wonder a greater number of students are opting for higher education abroad. However, international degrees and courses are expensive. A degree from the US, including tuition, fees, room, and board, can cost INR 30 Lakhs to INR 1 Cr. or even more for top universities. Over the past three years, this sky-high amount has significantly increased, becoming exorbitant, especially for international students. 

    Be it the US, UK, or Australia, a minimum corpus of INR 20 to 30 Lakhs is necessary to afford a foreign degree. For those who can’t pay the bill out of their pocket, financing becomes essential.  
    With the total education loan amount disbursed in India growing to INR 22,550 crore in FY19 from INR 16,800 crore in FY16, it is obvious that an education loan is the preferred route to funding studies abroad. However, only 2.5 Lakh education loans were sanctioned in FY18-19. In FY14-15, the number was 3.34 Lakhs. The stats indicate that while banks are keen on sanctioning higher-sized loans, they do so only for capable students.

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    So, how do you guarantee that your loan application isn't lost in the pool of uncountable applicants? And, how do you make your application rejection-proof?
    Well, the answer is simple - choose the right loan option that fits perfectly with your profile. So, what are the loan options available for Indian students aspiring to study abroad? 
    That’s the topic we dive into today.

    What is a Secured Education Loan?

    For loans higher than certain amounts, public banks, private banks and NBFCs ask for collateral. E.g., public banks like SBI and BOB demand security for education loans over INR 7.5 Lakhs. 
    Such education loans that need a guarantee in the form of collateral from the borrower (or co-applicant) are called secured loans. They have lower interest rates and are easier to get since the risk to the bank is much lower. 
    Why is the security required for an education loan? The bank uses it when the loan becomes a Non-Performing Asset, which happens when the applicant defaults on repayment.

    Check Your Education Loan Eligibility Apply Here

    What is Collateral Security for Education Loan?

    Collateral can be a tangible or intangible asset. A constructed home, flat or apartment, and non-agricultural land, etc. are all examples of tangible assets. Insurance policy and fixed deposits are examples of non-tangible collaterals. The kind of asset eligible as collateral varies from lender to lender.

    What is Unsecured Education Loan?

    An education loan that doesn’t ask the borrower to pledge security is called an unsecured loan, i.e. collateral is not needed. Besides the non-requirement of collateral, unsecured education loans have one more advantage. Their processing time is swift because the paperwork is less complicated.
    Since the risk that the financial institution takes is greater, the interest rates of loans without collateral are higher. These loans also demand a co-applicant or co-signer. It is on the basis of the co-applicant’s income and CIBIL score that the loan is sanctioned.

    What are the Differences Between Secured and Unsecured Loans for Higher Education?

    In secured loans, the interest is lower, the loan amount is higher, and you are not required to pay back any amount during and 6 months after the course. In unsecured loans, you start paying interest partially or entirely while you are studying. Private banks like Axis Bank and NBFCs like Avanse etc. allow a year’s time after course completion to students before the EMIs begin but the interest has to be paid (fully or partially) soon after disbursement. 
    Furthermore, secured education loans are relatively easy to get for most countries but the processing time may be slightly longer. Unsecured loans are tougher to get for most countries except the US, Canada, and Australia. 
    The table* below gives a far more comprehensive view of secured vs. unsecured education loans.
     

    Criteria

    Secured Education Loan from PSBs

    Unsecured Education Loan from Private Banks

    Unsecured Education Loan from NBFCs

    Rate of Interest

    8.85%** onwards

    11.25%** onwards

    12% - 15%** and onwards

    Maximum Loan

    1.5 Crore

    40 Lakhs

    50 Lakhs

    Chances of Approval

    Higher

    Low (Depends on country & college)

    Average

    Expenses covered

    70% to 100%

    90%

    100%

    Interest Repayment during moratorium period

    No

    Yes, Simple Interest

    Yes, Simple or partial interest

    Moratorium Period

    6 Months after completion of course

    1 Year after completion of course

    1 Year after completion of course

    Co-applicant income

    Not Considered

    Extremely Important

    Extremely Important

    Repayment Period

    Longer (SBI and BOB offer up to 15 years)

    Longer (Axis Bank offers up to 15 years)

    Shorter (Avanse offers up to 10 years)

    Processing Time

    More (Up to 20-50 days, with GyanDhan only 15 days )

    Average (15-20 days, with GyanDhan only 7 days)

    Shorter (Within 10-12 days, with GyanDhan 3 days)

    *The above comparison takes into consideration public banks (SBI), private banks (Axis Bank), and NBFCs (Avanse). 
    **Mentioned rates as on November 21, 2019  
     

    Calculate Your Education Loan EMI Check Here

    Which Education Loan is Better?

    The Choice Between Secured or Unsecured -
    Both types of study loans have their merits and drawbacks. That said, if you have suitable collateral, secured loans are safer and better alternative for four reasons:

    • They charge a lesser interest rate, which saves money in the long-run. Additionally, some lenders like SBI offer a fixed-rate option throughout the repayment period as compared to floating rates of other lenders. To know more about the fixed-rate education loans from SBI, request a call back from GyanDhan.
    • You can get as much as INR 1.5 Crore as loan. You can’t get such a high amount of loan without collateral property
    • The time you get to repay the loan is much longer (and flexible sometimes).
    • The loan comes with tax-deductible benefits that will help you save on taxes.

    The Choice Between Lenders -
    If you are confused between lenders, then your preference in decreasing order should be:

    • Public Bank (lowest interest rates) 
    • Private Bank (lower interest rates than NBFCs) 
    • NBFC (Higher rates than public and private banks but in INR) 
    • International player (Loans in other currency, not recommended if you are getting a loan from any of the above-mentioned three) 

    To sum up, a secured education loan from a public bank should be your first pick. Select a private bank only if:

    • You don’t have a lot of time for loan approval.
    • You need a loan of over INR 7.5 Lakh, and you have no collateral to offer. 

    It is possible to get an NBFC education loan without collateral, but they should be your choice only when private banks consider:

    • The co-applicant's income to be inadequate
    • Or the college or university is ineligible

    What Are Your Choices of Education Loan Lenders?

    There are several educational loan providers that students can turn to for help. Public sector banks like SBI and BOB, private banks like Axis and ICICI, Non-banking financial companies like Avanse and Incred, and international lenders like Mpower, etc. are few of the many options a student who is seeking a loan to study abroad has. 

    • PSBs like SBI offers low-interest rates, but the documentation process is long and complicated. The maximum loan they offer without security (unsecured) is INR 7.5 Lakhs and INR 1.5 Crore for secured loans. It takes about 20-50 days for a PSB to review an education loan application (with the help of GyanDhan it can be expedited to 15 days). SBI makes for a great choice if you have a security to a mortgage. Also,  education loan for girls come with lower interest rates.  SBI offers subsidised interest rates for females, and for Rinn Raksha policyholders, the interest rates further reduce by 0.5%.
    • Private banks like Axis Bank have slightly higher interest rates, but they offer education loan without mortgage up to INR 40 Lakhs based on the co-applicant income, but for a few selected universities. Their processing time is average, but acceptance criteria are stringent. Until the applicant provides absolute surety of repayment and substantiates it with a satisfactory co-applicant income and strong CIBIL history, the chances of education loan rejection from private banks remain high.
    • NBFCs have very high-interest rates, but their processing time is swift and documentation is much simplified as compared to the public & private banks. Plus, their sanctioning procedure for education loans for abroad studies without security is entirely based on the income and CIBIL score of the co-applicant.
    • International lenders have the highest interest rates considering currency fluctuation (that might seem low at first), but their documentation procedure is pretty straightforward and co-applicant is not required. Moreover, they process the application rapidly. The only drawback is the eligibility of the course and college; they offer loans for a select few.

    Possible Reasons for Loan Rejection 

    Lenders have become wary of NPAs, which is why they are declining more student loans. Awareness (and elimination) of the most common reasons for rejection, strengthen your chances of approval.

    Secured Education Loan

    • Incomplete paperwork, especially on the collateral, raises the chances of your loan being declined.
    • If the lender is not satisfied with the proof of admission to the foreign university or school, the application may be rejected.
    • In case the collateral offered is agricultural land or B-Khata property (in Bangalore), the possibility of getting a secured loan weakens. 

    Unsecured Student Loan

    • An ineligible university is the number one reason why unsecured loan applications are rejected by private banks. If you are questioning, “Can I get an education loan without collateral for my college,” check with GyanDhan before applying
    • If the student’s past academic performance has been poor, an unsecured student loan is harder to get. 
    • Another reason a lender may decline a study loan is an insufficient income of the co-applicant, which exhibits his inability to pay interest during the moratorium period.
    • In case the co-signer is already shelling out other EMI’s, the chances of refusal increase further.
    • A lender may also reject a collateral-free education loan if the CIBIL score of the co-applicant is weak.

    GyanDhan Education Loan: How Can We Help?

    It’s not merely selecting the best education loan that takes energy; the actual loan process is even more cumbersome. GyanDhan works towards easing that procedure with one goal in mind - the lack of financial aid should not be a deterrent to any student’s dream of studying abroad.
    Here's how we help you get an education loan without collateral (or with one):

    Phase 1

    • Our experts create an accurate profile evaluation to check your education loan eligibility, which you can do too, here.
    • We identify and recommend the loan options that befit. For example: if you have just 10 days in hand to get a loan, we will not recommend a PSB because their processing period is much lengthier.

    Phase 2

    • We tied-up with all major lenders (SBI, Incred, ICICI, Avanse, BoB and Axis) to streamline the loan process. For instance, the exact documents required with a loan application vary from lender to lender and sometimes area to area. We provide you with a customised checklist of the requisite paperwork for your area and chosen lender. 
    • Furthermore, we coordinate with lawyers and property evaluators to guarantee that your collateral paperwork is in order.
    • When it comes to submitting documents, you have two options. Either upload them directly through our website (In case of unsecured education loan), or we can pick them up from your doorstep(In case of a secured loan) if you live in a Metro city.

    Phase 3

    • Generally, it takes countless visits to the bank for loan approval. As partners to education loan providers, GyanDhan ensures that those visits are limited to a few.
    • We constantly follow up with the lenders and keep an eye on your loan application progress so that funds get sanctioned on time.

    When you take GyanDhan’s assistance, the chances of both secured and unsecured student loan approval increase by 1.5 times because we are with you throughout the education loan procedure. We can also help in admission counselling, university shortlisting, LOR review and SOP review. Your relation with GyanDhan starts when you get in touch with us and we remain with you from documentation, processing, disbursement to loan repayment and extension of repayment tenure (if required). 

    If you’re still confused about how to get an education loan easily, request a callback. Also, check your loan eligibility to find out how much loan you can acquire with our help. We’ll take all the effort, allowing you to focus on more pressing matters.

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