Benefits of Collateral Education Loan

The majority of Indian banks require collateral security when you apply for an education loan. A collateral education loan, also known as a “secured education loan,” is any kind of property—movable or immovable—offered as security for a loan. When the security value is lower and cannot cover the loan amount, collateral is offered. Primary security is created from a loan awarded to the student.

A secured education loan, sometimes referred to as a collateral education loan, is one in which you must pledge real estate or any other acceptable financial asset as security for the loan. Collateral is the real estate and money that you pledge to the lender—also known as immovable property or liquid security.

Secured loans are those for education that are backed by collateral. Unsecured loans, also referred to as unsecured loans, are offered by numerous banks and non-banking financial institutions for educational purposes. An interest rate on a secured loan may be lower than that of an unsecured loan because secured loans have a lower risk factor.

Students often find themselves confused when encountering the term “collateral education loan” as they are uncertain about its meaning and the type of security it entails. In essence, collateral refers to an asset that is pledged as security for your education loan. This asset can take the form of tangible items such as a house or intangible assets like a fixed deposit.

To lower the risk associated with repaying the credit, an education loan requires collateral or collateral security. Since not every student graduates with a job right away, the banks cannot guarantee the future income and credit standing of their graduates. Collateral is necessary for this reason.

Collateral is required by banks and other financial organisations in order to reduce risk. Collateral is used to cover the cost of education loans in the event that a student defaults on them.Collateral is required by banks and other financial organisations in order to reduce risk. Collateral is used to cover the cost of education loans in the event that a student defaults on them.

Different types of collateral do lenders accept

• Immovable property: A stand-alone house, a flat or a plot of land are examples of immovable property that lenders will accept, in addition to non-agricultural land with a clearly defined border. Agribusiness land is not acceptable as collateral. The bank has hired an appraiser to assess the property. All original property papers, including the registered sale deed, the approved plan or map, and any links or chain documents, must be pledged with the collateral.
• Liquid assets: These include government bonds, life insurance policies (LICs), and fixed deposits (FDs). These assets are bought at their exact value because they can be quickly converted into cash. Maintaining FDs with the same institutions from which they are borrowing money is one thing that borrowers should think about. Either a brand-new FD can be opened for the purpose, or an existing FD can be used to secure the loan. Interest payments on the FD will be made in the regular manner to the holder. LIC ought to be a maturing policy with a predetermined maturity date when utilised as collateral.
• Third-party collateral: If the borrower does not have any collateral of their own, they may offer third-party collateral that is owned by relatives or friends. The original documentation for the collateral must be provided in this case as well.

Benefits of collateral based education loans

Collateral education loan come with several benefits, making them an attractive option for students and their families. Here’s an elaborate explanation of the mentioned benefits:

• Collateral security: One of the primary advantages of a collateral education loan is that it requires collateral. Collateral can be in the form of assets like property, fixed deposits, or other valuable assets. This reduces the risk for the lender, allowing them to offer more favorable terms and lower interest rates.
• Simple online application: Many lenders now offer a straightforward online application process for education loans. This simplifies the entire loan application process, making it more convenient for borrowers to apply from the comfort of their homes. The online application typically involves submitting necessary documents digitally, reducing the paperwork and processing time.
• Section 80E tax advantages: Section 80E of the Income Tax Act in India provides tax benefits on the interest paid on education loans. This benefit is available to the individual who has taken the loan for their education or for the education of their spouse or children. The entire interest paid on the loan is deductible from the total income for up to eight years, starting from the year in which the repayment begins.
• Flexible payback arrangements: Collateral education loan often come with flexible repayment options. Borrowers can choose from various repayment plans, such as a standard repayment schedule or an income-driven repayment plan. This flexibility helps borrowers tailor the repayment structure to their financial situation and capacity to pay.
• Long-term moratorium: Moratorium refers to the period during which the borrower is not required to make any repayments, usually during the course of study and a certain period afterward. Collateral education loan often come with a more extended moratorium period, providing students with ample time to complete their education and secure a job before they start repaying the loan.
• No margin money up to Rs. 4 Lakh: Some collateral education loan come with the benefit of no margin funding for loan amounts up to a specified limit, such as Rs. 4 lakh. This means that the borrower may not be required to provide any upfront payment (margin) for the specified loan amount, making it more accessible for those who might face financial constraints.

In summary, collateral education loan offer financial support for education with added advantages such as tax benefits, flexible repayment options, and the use of collateral to secure more favorable terms. The online application process adds to the convenience, and the moratorium period provides a cushion for students to establish themselves before beginning loan repayments.