In the competitive environment of present times, students need something extraordinary. By extraordinary, we mean doing something that the majority is not doing. Getting an education from the world’s top universities can completely change the prospects of students. Take the name of the CEOs of the fortune 500 companies of the world, and they will have a degree from one or the other top university of the world. Being ahead is not a requirement but a dire need to excel in the world where everyone is fighting tooth and nail to get the top spot. Earlier the study abroad loans had a very narrow landscape with barely a couple of hundred students getting loans. And most of the loans were sanctioned to well- healed people.
However, with the expansion of banking services, the emergence of NBFCs, more financial inclusion, things have started to change. In the last decade, from 2010 onwards, we have witnessed a paradigm shift in the lending culture. Now, the government and private institutions are proactively lending for abroad education loans. It’s the best time for students from all sections of society to explore the choices and get the best possible education at very affordable costs.
Types Of Education Loan For Abroad Studies
Secured Loans: These are the loans that students can take if they have collateral to pledge against the loan. One of the benefits of a secured loan is the higher lending limits. Be it the government or private bank or an NBFC; the lending limits are higher for secured loans. Securing a loan against the collateral helps banks in recoveries in case of non- repayment of the loans. So they tend to lend more for those borrowers who have a liquid asset to pledge like land(not agricultural), gold, flats, etc.
Unsecured Loans: India is a country with a low per capita income, and it is roughly around $2191 or INR 161149.36. So it is evident that a majority of the population can’t afford to take loans that run into several lakhs or even crores in some cases. Here, the unsecured loans come into play. Private banks, NBFCs, and international lenders provide collateral-free or unsecured loans to meritorious students who don’t have any collateral to pledge for a secured loan. However, it is unfortunate that government sector banks are yet to venture into this space of unsecured lending.
The process involved in Secured Loans
Secured Loans, as mentioned above, have greater limits, and the borrower has to pledge collateral to back the loan. The process begins with the submission of collateral documents, and it is very important to check all the documents beforehand. In case of any discrepancy among the documents submitted, the chances of rejection of loan application increases. It’s advised to have assistance from experts in the field so that one can be assured of getting the loan approval without any unwanted delay.
Another moot question is about the nature of collateral that a loan applicant can pledge. Banks provide a range of assets that can be pledged against an education loan. Assets like Real Estate that includes home and land. One can also pledge other collaterals like Gold, Fixed Deposits, etc. While assets in the real estate category are considered risky amid the fear of price fluctuations, the loan amount sanctioned is relatively lesser than assets with more liquidity.
In layperson’s terms, the Liquidity of an asset is its capability to convert itself into cash. So assets like Fixed Deposits and Gold have higher liquidity, and the sanctioned loan amount is roughly 90% of the value of the assets. In the case of real estate, the approved loan amount is 70%-75% of the asset’s value.
After the submission of collateral documents and assessment by the bank, the loan approval takes anywhere between 10-15 days. The number of days varies from one financial institution to another. Having a fintech company working in this space with the loan applicant can significantly reduce the time taken to approve the loan.
The process involved in Unsecured Loans
Not all the students come from affluent backgrounds and thus can’t pledge collaterals of value in crores. Thus it becomes imperative to include those who can’t pledge any security. Only private banks and NBFCs give unsecured loans for education abroad since the government banks have capped the maximum loan amount to INR 7.5 lakhs for unsecured loans. Private banks like Axis Bank, ICICI Bank, HDFC Bank are providing unsecured loans. NBFCs like Auxilo, InCred Finance, Avanse, etc., are also working, and international lenders like Prodigy Finance also provide collateral-free loans.
The lending process puts the impetus on two crucial factors: the income of the co- applicants and the other is the academic track record of the students. Lenders often compromise on the annual income if the student is meritorious. The policies vary from one lender to another and also vary from one applicant to another.
With all the details in place, the loan approval is finalized within a span of two weeks and, in some cases, even within a week.
Factors To Be Considered Before Choosing an Education Loan
Interest Rate on loan: This is a very crucial aspect of any loan. Once the loan is approved, the interest rate remains fixed unless the applicant has chosen a floating interest rate. Even a slight change in interest rate will have a considerable bearing on the overall amount to be paid.
Processing Fee on loan: Making a wise choice by choosing a loan with zero or a minimal interest rate can save a lot of money for the borrower. In many cases, banks charge anywhere between 2%-5% of the loan amount as the processing fee, which can significantly impact the borrower’s finances.
Tenure of the loan: Choosing a reasonable loan tenure is also crucial for a feasible loan structure. If the loan tenure is too short, it may inflict a huge financial burden at the time of repayment. On the other hand, if it is too long, then the interest amount may rise overly.
Moratorium Period/ Repayment Holiday: It is the time after the completion of the course after which the repayment will start. There is no fixed moratorium period, but it can be anywhere between six months to one year.
Banks or NBFCs, the better choice
Many borrowers have this question in their minds as to what is a better choice? No uniform set of criteria can ascertain the better choice. It solely depends on the type of loan one wishes to take and the feasibility of the above-mentioned factors. Some may choose to pay a higher interest rate if the lender allows skipping repayment at the time of studies, while others may prefer otherwise.
Usually, banks have lower interest rates than NBFCs but it again boils down to the fact that who is giving the best loan, and it varies from one borrower to another. NBFCs give high loan amounts even in unsecured loans, which is not the case with Private banks. However, loans from banks allow claiming an exemption under section 80E of the income tax act, while this is not the case with NBFCs. So, there are positives and negatives to both, and there is no one size fit all criteria for abroad education loans.