When applying for a secured education loan, one of the key requirements is providing collateral, which is an asset that you pledge to the lender as a guarantee for repayment.
If you're exploring education loans to fund your studies abroad or in India, it's important to understand what collateral for education loan means, the different types accepted by lenders, and why it's sometimes necessary.
In this article, we will focus on collateral: what is collateral for an education loan, types of collateral for loans, and why some loans require it.
What is a Collateral Education loan?
A secured student loan is a type of education loan that requires collateral. Collateral is something valuable that a borrower pledges to the lender in exchange for the loan. It can be physical assets like property or financial assets like fixed deposits and insurance policies.
In India, you may get an unsecured education loan for abroad (loans without collateral) up to a certain limit. However, for higher loan amounts, collateral is usually required, and the criteria may vary.
The higher the value of the collateral, the larger the loan amount a student can get. Secured loans also come with lower interest rates and better repayment terms, making them a smart choice for funding higher education.
How Collateral Works
Before approving a loan, lenders want assurance that the borrower can repay it. That’s why many require a form of security known as collateral. Collateral helps reduce the lender’s risk by ensuring the borrower has a strong incentive to fulfil their repayment obligations. If the borrower defaults, they risk losing the asset they’ve pledged, such as their home or other valuable property.
Loans backed by collateral often come with significantly lower interest rates compared to unsecured loans. The lender's legal right to claim the collateral in case of default is known as a lien, which grants them the authority to recover the outstanding loan amount through the pledged asset.
If a borrower fails to repay the loan, the lender can take possession of the collateral and sell it to recover the dues. In some cases, if the proceeds from the sale don’t cover the entire loan amount, the lender may also take legal steps to recover the remaining balance.
Types of Collateral for Education Loans
When you apply for an education loan, you may be asked for collateral. This means you need to offer something valuable as a guarantee for the loan. The type of collateral for loans you can use depends on your eligibility and your financial situation. Here are some common options:
- Movable Collateral: Movable/liquid collateral, such as a fixed deposit, can be used.
- Immovable Collateral: Immovable collateral, such as a flat, house, bungalow, land (non-agricultural), land or shop, etc
Things to Consider When Choosing Collateral
Here are some factors to consider when choosing collateral for your loan amount:
- Loan Amount: The value of your collateral should be sufficient to cover a significant portion of the loan.
- Liquidity: Select collateral that can be easily sold if necessary. Real estate could take longer to sell than cash or fixed deposits, which are quite liquid.
- Impact on Your Finances: Pledging essential assets can create financial strain if you default on the loan.
- Joint Ownership: Make sure that everyone who owns the collateral agrees to its use as security.
Conclusion
Taking an education loan is a key step toward higher studies, and understanding collateral can simplify the process. Secured loans offer lower interest rates, while unsecured loans provide options for those without assets. Assess your repayment ability carefully before making a choice. Credila offers both secured and unsecured education loans for students planning to study abroad, with flexible terms to suit different financial needs. The right loan can turn your academic goals into reality.
Disclaimer:
As of March 31, 2024. T&C apply.
Credila Financial Services Limited (Formerly known as HDFC Credila Financial Services Limited)
The education loan facility provided by Credila Financial Services Limited ('The Company') will be at the sole discretion of the Company and within the Company's prescribed credit and underwriting norms/guidelines prevailing at the time of processing and disbursing the education loan. The Company maintains the right to change the interest rate at any time and at its sole discretion, without prior notice.
