In the early days (before 1990), when a student went abroad for studies, either his parents had to dole out the money or he had to get a full merit scholarship for his studies, that would cover tuition cost as well as living costs, food and personal expenses.
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Under these, the student typically gets a full tuition waiver along with becoming a teaching assistant (where he would have to take classes of a professor at the university) or research assistantship (where he would have to assist the professor in his research work and also do administrative jobs of the professor).
This concept of student loan with collateral started in 1995. And, State Bank of India (SBI) was the first to roll out this scheme in India.
After 2000, this form of study abroad financing became the most prominent one, allowing many students to pursue their overseas dreams notwithstanding their parents’ financial condition.
But with loans gaining ground as the main route to getting finance, the study abroad scenario has seen a sea change.
An education loan for studies abroad covers tuition costs along with other costs, like living expenses such as food and room rent, besides personal expenses.
So, what exactly is an education loan with collateral?
An education loan with collateral is when an applicant takes a loan, of say Rs 50 lakh (Rs 5 million) and attaches a collateral or in other words security along with it like a house or fixed deposit (FD).
So, in case of default, a bank can sell off the asset and recover the money. A collateral can be classified as moveable type or immovable assets.
Examples of moveable assets are LIC policies, FDs or insurance while immovable assets comprise property like house or land that is classified as non-agricultural.
Also, there is a third type called third-party collateral. If a borrower can’t give a collateral by himself, he can provide collateral that belongs to a relative or a friend. But the quality of the security has to be very good.
Here, if the borrower does not pay back the loan, the money is recovered from the third-party collateral provider.
Why do PSBs require security?
Public sector banks (PSBs) are already grappling with high non-performing assets (NPAs) (that is, the money they are unable to recover is very high and sometimes touches 10 per cent of the amount sanctioned in case of all loans).
After the Nirav Modi and Vijay Mallya scams, PSBs have been told by the central government that they cannot afford to keep their NPAs high and have to put a check on them.
Also, in education loans, the NPA for engineering course loans is almost touching 10 per cent, and for MBA loans, it is 5 per cent. So, the PSBs are treading cautiously.
What per cent of the collateral provided is sanctioned as loan?
Say, if you provide a security of Rs 1 crore (Rs 10 million), you may get a loan of, say, Rs 75 lakh (Rs 7.5 million). But it may vary from bank to bank.
Some banks may have a 70 per cent loan criteria while other banks may provide an education loan of 80 per cent of the collateral.
For example, State Bank of India (SBI) may provide up to 70 per cent but to get higher amounts, you will need to tap private banks. But mind you, the interest rates of private banks are much higher compared to PSBs.
If the asset quality is good and the collateral provider’s CIBIL score is impressive, SBI and other public sector banks can even sanction 90 per cent as study loan. So, the student has to provide the remaining 10 per cent.
That is, if a student provides a security of Rs 1 crore (Rs 10 million), he can get a loan of up to Rs 90 lakh (Rs 9 million).
If a student gets admission into reputed universities like Stanford or Harvard and provides a good quality asset, he can surely get 90 per cent of the collateral as loan.
A bank also sees the quality of the university or college because this helps it understand the probability of a student to land a job after studies.
Some important points on education loan with collateral:
Students can get amounts of up to Rs 1.5 crore (Rs 15 million) at 9 per cent interest from PSBs, usually.
A loan with collateral carries much lower interest rate than a loan without collateral (9 per cent against 12-16 per cent).
For a loan with collateral, parents’ income may not be required. But if the income is high, it could come as an added advantage.
Repayment period could be longer for such a loan compared to a study abroad loan without collateral.
All countries accept loans with collateral as actual proof of funds.
These loans are easily approved compared with loans without collateral.
Some disadvantages of loan with collateral are:
Students from financially weak backgrounds may not get approval for such a loan despite good academic record.
A lot of documentation is needed. Also, if you are giving your house as security, the value of the house will be depreciated against its age. So, the value of the house may come down substantially compared to your expectations (that is, market value).
Documents that may be required if a house is given as collateral are original property papers (along with photocopies) such as registered sale deed, sanctioned house plan and possession certificate, among others.
Eligibility for getting an education loan with collateral.
A student should be an Indian citizen and have a minimum academic merit (Say 60 per cent in graduation). Also, academic history should be commendable.
Collateral papers should be intact. Say, if a property is given as collateral, any missing document may be unacceptable to the bank.
The collateral provider must have a good CIBIL score (above 750).
Some banks that provide study abroad
loans with collateral.
1. State Bank of India: SBI can provide loans up to Rs 1.5 crore (Rs 15 million).
2. Bank of Baroda or BoB can give up to Rs 85 lakh (Rs 8.5 million) for universities listed by it and Rs 65 lakh (Rs 6.5 million) for universities that are not listed.
3. ICICI Bank can provide up to Rs 1 crore (Rs 10 million).
4. For Axis Bank, this figure can touch Rs 80 lakh (Rs 8 million) (depends on the loan taker’s profile).
5. Incred can provide loans up to Rs 60 lakh (Rs 6 million).
6. Avanse: The maximum amount of loan can vary and the criteria could depend on the student’s profile and co-applicant’s income and CIBIL score.
Please check with banks for updates.
Loan calculation
SCENARIO 1: Rs 1 crore loan @ 8 per cent interest
Loan amount: Rs 1 crore (Rs 10 million)
Interest rate: 8 per cent
Duration: 10 years
EMI: Rs 121,328 (Rs 1.21 lakh)
Total payment: Rs 1,45,59,311 (Rs 1.45 crore or Rs 14.5 million)
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SCENARIO 2: Rs 50 lakh loan @ 8 per cent interest
Loan amount: Rs 50 lakh (Rs 5 million)
Interest rate: 8 per cent
Duration: 10 years
EMI: Rs 60,664
Total payment: Rs 72,79,656 (Rs 72.79 lakh or Rs 7.28 million)
----------------------------------------
SCENARIO 3: Rs 50 lakh loan @ 7 per cent interest and (extended) duration of 15 years (CHEAPEST loan offered by State Bank of India)
Loan amount: Rs 50 lakh (Rs 5 million)
Interest rate: 7 per cent
Duration: 15 years
EMI: Rs 44,941
Total payment: Rs 80,89,454 (Rs 80.89 lakh or Rs 8.09 million)
(Study abroad loans WITH collateral generally have a 8-11% interest rate to be repaid usually over a 10-year period). EMI is equated-monthly instalments.
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Documents required for
loan with collateral:
If house is kept as
collateral.
Photocopies of all pages of the house deed
Copy of approved plan
Land allotment document
Possession certificate (If applicable)
Latest property tax
receipt
If papers like fixed deposit/LIC
policy are kept as collateral.
FD or LIC policy certificate
If land is the collateral.
For students availing study abroad loans with collateral, the funds can cover airfares, tuition fees, living costs as well as books and study material. Some additional documents needed could include:
- KYC papers like Aadhaar card, PAN card or voter ID
card of applicant and co-applicant.
- Marksheets and certificates of Class 10 and 12 as well
as university degree of applicant.
- SAT, GMAT, GRE, TOEFL or IELTS scores of applicant could be
required.
- Admission offer letter from a recognised university
abroad as well as the required fees of applicant.
- Bank statement during the last six months of co-applicant.
- Copies of passport-size photos of applicant and co-applicant.
- Income proof of co-applicant (like salary slip/Form 16 or I-T returns for previous three years, among others) may be required. Co-applicant can be salaried or self-employed.
Please note that banks prefer to sanction loans for STEM (science, technology, engineering and mathematics) courses compared to non-STEM courses.
Also, countries
preferred by financial institutions include the US, Canada, the UK, Ireland, Australia
and Germany unlike China, Russia or Ukraine.
READ ALSO | Pros and cons of a Prodigy Finance loan
Conclusion
A study abroad loan with collateral is beyond the reach of most meritorious students, so this could see majority of pupils flocking for non-collateralised loans, and hence, this concept of collateral may soon fade away.
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