If you’re considering taking out an education loan for a substantial amount, you have the option to use collateral to secure it. Each bank has its own set of rules for loans, and they follow guidelines set by the Reserve Bank of India (RBI). However, when the loan amount exceeds a certain limit, a third-party guarantee may be required. Collateral serves as security for the loan, and the bank can recover the loan by selling the pledged assets if the borrower is unable to repay it.
Assets That Can Be Pledged
Assets that can be pledged to secure an education loan include:
- House property
- Land property
- Fixed deposits
The loan amount and the value of the assets being pledged are assessed through a thorough process before the loan is approved. This type of loan is known as a collateralized loan.
Guarantee Not Required Up to a Certain Amount
It’s possible to obtain an education loan without pledging assets. The Credit Guarantee Fund for Education Loans (CGFEL) scheme allows borrowers to obtain loans without a third-party guarantee. This loan model falls under the Education Loan Scheme of the Indian Bank Association. With this scheme, no guarantor or collateral is required for loans up to Rs 7.5 lakh.
Under the CGFEL scheme, you can secure a loan of up to Rs 10 lakh for studying within the country and up to Rs 20 lakh for studying abroad. However, if the loan amount exceeds Rs 7.5 lakh, the bank may request collateral, margin money, and a third-party guarantee.
Higher Interest Rates
While some banks offer loans of more than Rs 7.5 lakh without collateral (subject to certain conditions), the interest rates for such loans are typically higher. Therefore, it’s important to gather information about the interest rates from the bank before taking out a loan.
As of January 2023, government banks may charge interest rates ranging from 7.65 percent to 9 percent on collateral education loans. In private banks, this rate can go up to 10.5 percent. The specific rate depends on the policies of individual banks. It’s crucial to inquire about the interest rate and terms when considering an education loan.