Collateral or non - Collateral Study Abroad Loans- Which is Right For You?

Opting for an education loan for international studies can sound intimidating. So, when should a candidate choose an education loan for abroad studies? After applying to the universities abroad, the institution asks the applicant to share proof of having enough money to spend on the course.

For instance, the US embassy asks only admitted scholars to share evidence of liquid assets such as provident funds, gold, or equity investments. If the liquid assets do not match the university or embassy requirements, the candidate has to apply for a loan. An applicant gets two options: collateral and non-collateral.

Collateral vs. Non-collateral: Which One Is The Right Fit?

Here's a comprehensive guide to collateral and non-collateral loans:

Education Loan with Collateral

A collateral or secured educational loan is when the applicant needs to pledge real estate or other financial assets and take a loan against it. The features of the education loan with collateral include:

• Intangible or tangible security required for the loan
• Secured academic loans with high loan amounts (around INR 1.5 Cr)
• Lower interest rates (from 8.85%)
• No proof of parental income is required (but lucrative income evidence can be advantageous)
• Extended repayment duration
• Tax benefits

Various Types of Collateral Accepted by Lenders Accept

A secured student loan for study abroad accepts the following collaterals:

Immovable Property 

Non-agricultural lands are accepted for collateral loans having defined borders. The immovable real estate can be an apartment, a plot, or a standalone house. Note that agricultural land is not accepted as collateral. Original papers like registered sale deeds, links or chain documents, and the authorized map or site plan are required.

Liquid Assets

The best examples of liquid assets include LIC (life insurance plans), FDs (fixed deposits), and government bonds. These assets can be transformed into instant cash and bought at the exact value. A family that wants to send their child abroad for higher international studies can borrow money from a financial institution in exchange for their FDs. Someone can purchase a new FD before applying for the loan. For example, the LIC must be a maturing policy with a confirmed maturity date.

Third-party Collateral 

If someone has a party for pledging collateral (for example, family members or friends), it is called third-party collateral. In this type, the loan is approved only after showing the original paperwork.

Value of Collateral Loans for International Education

How does the valuation of collaterals occur for education loans? Let's dive into the following points:

For Immovable Property

Bank-approved valuators do the valuation after visiting the property and checking the municipality approvals and documents. Values mentioned in the valuation report include: 

• Fair Market Worth
• Realizable Worth and
• Deferred Value 

The loan is usually expected at a maximum of 70% to 80% of its net worth. For instance, if the value is, Rs.60 lakhs and its collateral margin is 20%. So, the 80% value is Rs. 48 lakhs which will be offered to the borrower for an international educational loan.

Liquid Assets

For FDs, the principal value will be considered. On the contrary, surrender value and face value will be considered for insurance policies and government bonds.Note that liquid assets do not have any collateral margin as they can be easily converted to cash, thereby eliminating valuation and legal procedures. It results in a speedier processing time for the loan to confirm.

Loan Limits & Interest Rates

Opting for a secured education loan abroad is the best way to finance international education. It offers around 1.5 crores as a collateral education loan or more. The amount is based on the following parameters:

• The pledged collateral's worth

• The total loan requirement of the candidate (including living expenses, tuition fees, and travel costs)

Until January 2023, the collateral loan's interest rate in public banks is 7.65% & 9% and begins at 10.5% considering private lenders.

Education Loan without Collateral

A loan where scholars or their family members do not need to mortgage their collaterals is better termed as non-collateral educational. It is an unsecured loan where the lender doesn't ask students to pledge to avail of the loan. Risks associated with this type of loan and interest rates are higher. Depending on their credit score and income, such loans require a co-signer/co-applicant.

• The student can avail of Rs. 40-50 lakh of loans without pledging any security
• Loans might be availed before the admission process
• EMIs are not needed to be paid in a moratorium period
• 100% finance is offered for higher education
• Top-up loans are available
• There's no pre-payment penalty required
• A paperless and speedy process

Eligibility Criteria for an International Education Loan with No Collateral

Here's the list of eligibility criteria for applicants who want to apply for non-collateral loans:

• Must secure 60% in 10th, 12th, and other degrees, and students with over three backlogs cannot apply for the student loan for study abroad plans.
• The CIBIL score of the co-applicants income should ensure that even if the student fails to repay the loan, the co-signer can pay the amount.
• PG or UG in STEM degree is preferable.
• The study-abroad destinations should be the US, the UK, Australia, Germany, Ireland, and other popular countries.

Documents Required for a Non-Collateral Education Abroad Loan

Education loans for international studies with non-collateral cover the tuition fees, flight fare, study materials, living expenses, and more. The lenders offer hassle-free education loans as soon as the candidate provides the following documents:

• KYC documents
• Two passport-size photos of both the co-applicant and the applicant
• Six months of bank statement
• The guarantor Form is optional
• Photocopy of the offer letter of the university or institute along with fees schedule
• Passing certification or mark sheets of the HSC, S.S.C., Degree courses, and entrance tests such as TOEFL or IELTS
• The guarantor's or borrower/co-applicants' income proof (i.e., Form 16 or salary slips) 

Types of Banks Offering Non-Collateral Loans to International Scholars

Two types of lenders are there considering an education loan for abroad studies without collateral: private and public banks. A private lender can offer a greater sum, while public banks offer a maximum of 7.5 lakhs of non-secured educational loans. Even top-tier institutes in India offer Rs. 40 lakhs of non-collateral education loans.

Private Banks for Unsecured Education Loans

The private banks offer one crore of education loans for international studies without collateral. The banks have top universities whereby they can approve an unsecured loan. These banks fund both UG and PG programs with a 10.5% of interest rate or above.

NBFCs for Unsecured Education Loans

NBFC, or a Non-Banking Financial Company, offers educational loans without collateral. They decide the loan amount depending on the scholar's choice of country. Foreign lenders cover 80% of the total expenses at a 9.25-16% rate. When converted into Indian currency, it becomes 14 to 15%.

Collateral vs. Non-Collateral Educational Loan for Indian Studies: A Tabulated Understanding

Here's the list of differences based on the following parameters:

Key Differences between Collateral and Non-Collateral

The key differences between no-collateral and collateral loans are mentioned below:

The Processing time

For non-collateral education, the processing time is 7-10 working days, provided the documents are submitted on time. On the contrary, collateral education loans may take months to get approved.

Embassy Acceptability

While getting an education loan for international studies, one must take care of the country's visa requirements. Some embassies of a few countries don't accept unsecured loans, but they accept collateral loans. They think scholars applying for collateral education loans will return to the nation after their education. But students with non-collateral education loans tend to immigrate to the nation as they have nothing to return for.

Amount & Rate of Interest

As described in the table, non-collateral education loans are available at higher interest rates starting at 10.5%. But collateral education loans are available at 7.65%. While collateral education loans offer a sum of 1.5 crores or more based on the pledged property's worth, non-collateral loans offer a maximum of 60 lakhs based on the eligibility criteria.

The Profile of the Co-applicant 

The co-applicant must have a good income with ITR & proof to apply for non-collateral loans. But no such requirement is there for a collateral loan. As a final verdict, it depends on a candidate's eligibility criteria to choose the right type of loan. However, the preference always goes to collateral loans, which are safe and has lower interest rates. After demonstrating the country's requirements and eligibility criteria, aspirants (who do not possess a property or asset) can apply for a non-collateral loan.