Imagine going from bank to bank, knocking on the doors of NBFCs and private lenders, only to hear the disheartening words, “Sorry, we cannot approve your loan.” This can be a crushing experience, especially for students desperately seeking financial support to cover their educational expenses. This story could be yours if you are unsure about what is a collateral and how to leverage it to secure a bank loan. By using collateral, you can approach any bank or NBFC to request the loan amount you need. A great collateral example includes assets such as a plot of land, a house, a fixed deposit, stocks, jewellery, or any other valuable property registered in your name. Learn about what collaterals are, their purpose, types, importance and examples by reading below.
Key Highlights
- Any asset with a real world value can be collateral.
- Banks usually give between 70-90% of the collateral’s value as a loan.
- There are collateral free loans, but the loan amount is small.
- Collateral lowers the risk for lenders because they can sell the assets if the applicant does not pay the loan.
What is a Collateral in Banking?
A collateral is an asset you can pledge to a bank to secure a loan. The asset for collateral can be either tangible (physical) or intangible (non-physical). For example, if Ravi wants a loan for his higher education but his CIBIL score and family income are low, most banks would reject his loans under normal circumstances. However, if Ravi has a plot of land that he can pledge to the bank to recover the loan if he fails to repay it, then banks will grant him an education loan. If Ravi does that, the bank will have the right to sell that property at an auction to recover the full or partial loan amount.
Types of Collateral Banks Accept
Collaterals can be broadly classified into two types: tangible and intangible. Both types of collateral must have real world value to be used for loans. Below, we have provided details of both types of collaterals.
Tangible Collateral: The assets owned by the applicant or the guardian of the applicant that we can see and feel are tangible collaterals. Such collaterals are mentioned below:
- Jewellery
- Land
- House
- Shop
- Business equipments
- Vehicle, etc.
Intangible Collateral: The assets which we can not see or touch physically but do hold value in the real world are classified as intangible collateral. For example:
- Stocks of a company
- Mutual funds
- Fixed Deposits
- Recurring Deposit
- Future income or salary
- Government Bonds
- Sovereign Gold Bonds, etc.
How Does Collateral Work in Education Loan?
The lending bank or NBFC will ask for collateral whose value is equal to or more than the loan amount. Some banks have specific requirements when it comes to collateral value and loan amount. For example, Bank of Baroda Education Loan requires applicants to pledge collateral which is valued at 1.25x of the loan amount if they take an education loan, which is more than ₹80 lakhs. Thus, students who want to pursue courses that are costlier should be prepared to commit collateral with higher value.
How Do Banks Calculate the Value of a Collateral?
Collateral value plays a crucial role in determining the amount of a student loan for education. Thus, applicants who have pledged higher value collaterals can get bigger loans with better interest rates. This is the reason why it is important to know how financial institutions calculate the value of an asset. Let us understand this with an example.
Suppose an applicant needs a loan of ₹20 lakhs to fund his education. However, banks require him to commit a collateral of the same value. When the applicant submits a copy of his land deed, the banks will send it for evaluation to find its original value.
To calculate the value of collateral, the applicant’s land will be appraised by a real estate expert to determine its value as per the current market. Based on that value, the bank decides how much loan they can give you. For example, the applicant needed a loan for ₹20 lakhs so the collateral value must be more than that. Banks usually give between 70-90% of the collateral’s value as a loan, which is known as loan-to-value (LTV).
The value of a collateral depends on the following factors:
- How easily the asset can be sold (its liquidity).
- Current market conditions.
- Your credit history and reliability as a borrower.
Risks and Considerations When Pledging a Collateral
While it is relatively easy to obtain a secured loan using collateral, it comes with certain risks that should not be overlooked, especially by students seeking quick education loans. The most significant risk is the potential loss of property. If your loan is classified as a Non-Performing Asset (NPA), meaning you haven’t paid the EMI for more than 90 days. After it has been marked NPA, the bank has the legal authority to seize your collateral. And after following due procedures, they can auction the asset to recover their dues.
Another major consequence of failing to repay a secured loan on time is a drop in your CIBIL score. Non-payment of EMIs can significantly reduce your credit score, making it difficult to secure future loans or even qualify for a credit card. Understanding these risks is essential before opting for a secured loan, as they can have long-term implications on your financial stability.
Student Loan Without Collateral
Getting a secured loan is quite easy but there are students who do not have any assets that they can use as collateral. For such students, banks also offer unsecured education loans. However, such loans are small in size and often have higher interest rates. Usually, banks provide non-collateral student loans to applicants who are meritorious and have shown great academic performance. Student loan without collateral is offered for candidates who have a valid proof of admission to the course for which they require the loan.
Options Available to Obtain a Student Loan Without a Collateral
Student loans without collateral can be obtained from banks, NBFCs and the government. The unsecured loans offered by banks and NBFCs in India are much smaller than secured loans. For example, a Bank of India education loan for domestic studies is up to ₹10 lakhs, and for study abroad, it is ₹20 lakhs for secured loans. Still, for unsecured loans (without collateral), it is only ₹7.5 lakhs. The central government of India runs the Pradhan Mantri Vidyalaxmi Scheme (PM-Vidyalaxmi), which extends up to ₹10 lakhs as an education loan without collateral.
List of banks offering education loans without collateral:
Bank Loans | Details |
ICICI Bank Education Loan | No collateral for loans up to ₹20 lakhs and ₹20 lakhs for UG and PG courses, respectively. |
Bank of India Education Loan | No collateral for loans up to ₹7.5 lakhs |
State Bank of India Education Loan | No collateral for loans up to ₹7.5 lakhs |
Canara Bank Education Loan | No collateral is required. Get loans up to ₹1.5 lakhs. |
IDBI Bank Education Loan | No collateral for loans up to ₹4 lakhs |
HDFC Bank Education Loan | No collateral for loans up to ₹7.5 lakhs |
How to Apply for a Student Loan Without Collateral
First, the applicant needs to be eligible for student loans offered by banks or NBFCs. Listed below are the important eligibility criteria for unsecured student loans.
- The applicant must be between 18 and 35 years old.
- They must have an admission letter from any recognised college or university.
- They must show a good academic record and have a valid result in the entrance exam for the selected course.
- A co-applicant is also required for the loan.
Steps for Unsecured Education Loan Application
- Go to the bank’s official website or the NBFC and visit the student loan section.
- Check the unsecured loan limits and then click on Apply now.
- Fill out the loan application and upload all the supporting documents.
- Choose the loan amount as per the unsecured loan limits and your requirements.
- Submit the application, and once selected, the authorities will provide you with the sanction letter, which will mention the loan amount, interest rate, repayment process, etc.
Also Read: Student Loan without Collateral – Eligibility, Key Features & Interest Rates
Summary
Acquiring large loans for higher education can be challenging without collateral. This is because collateral provides banks with added security, making secured loans a safer option for them compared to unsecured loans. Students can offer assets such as land deeds, jewellery, fixed deposits, and other valuable possessions as collateral to secure these loans.
FAQs
Who pays collateral?
A collateral is an asset which is pledged by the borrower to the bank. Thus, the collateral is paid by the borrower only.
What is the use of a collateral?
The collateral promised by the loan applicants is used to recover the loan and interest amount when the loan is declared a Non-Performing Asset (NPA).
What is an example of a collateral?
A few prime examples of a collateral is land, house, shop, jewellery, fixed deposits, recurring deposits, provident fund, stock of a shop, vehicles, etc.
Who owns the collateral?
After pledging the collateral to the bank, the owner will remain the same. Only after the loan is declared NPA is the ownership transferred to the bank legally, which is later on transferred to the person who buys the asset in a bank auction.
What is a non-collateral loan?
The loans in which the borrower is not required to pledge any collateral and the loan is granted solely on the basis of the salary of the borrower or their CIBIL score.
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