Collateral is an asset or property pledged by a borrower to secure a loan, providing protection to the lender in the event of default. It acts as a safeguard for the lender if the borrower fails to meet obligations or repay the loan. Lenders often require collateral when granting loans to mitigate associated risks. In non-repayment, the lender can seize and sell the collateral to recover the outstanding balance. This type of loan is termed a secured loan, which is more easily approved as the collateral serves as security. The loan amount approved in a secured loan depends on the value of the pledged collateral.
Answering the basic question i.e. “What is collateral in education loan?” – Collateral in an education loan refers to assets pledged by the borrower to secure the loan. It acts as security for the lender in case of non-repayment. Common types include residential properties, fixed deposits, government bonds, insurance policies, and, in some cases, non-agricultural open land. If the borrower defaults, the lender can seize and sell the collateral to recover the outstanding balance. Collateral is typically associated with secured education loans, assuring the lender.
There are 2 types of collateral that you can pledge to get a secured education loan. These are –
- Real estate assets like houses and flats fall under this category.
- Agricultural land and land under gram panchayat jurisdiction are not accepted as collateral.
- Non-agricultural open land with clear boundaries is considered suitable collateral for secured education loans.
- This category includes liquid securities, including fixed deposits, mutual funds, ULIPs, life insurance policies, and government bonds.
- Borrowers can choose to pledge an existing fixed deposit or open a new one for the education loan.
- The holder of the fixed deposit continues to receive any interest accrued on these intangible assets.
Following are the different types of collateral that are accepted by banks while giving secured education loans –
- Residential Property: Banks accept residential properties, such as houses or flats, as collateral for secured education loans, providing borrowers with the option to leverage real estate assets.
- Fixed Deposits: Fixed deposits are commonly accepted as collateral, allowing borrowers to pledge these stable and liquid assets to secure funding for education. The interest earned on the fixed deposit may continue to benefit the depositor.
- Government Bonds: Government bonds serve as approved collateral for secured education loans, offering a secure and reliable financial instrument for borrowers to pledge, contributing to the loan’s security.
- Insurance Policies: Various insurance policies, including life insurance, are recognized by banks as collateral, providing borrowers with the flexibility to use insurance coverage as security for education loans.
- Open Land with Boundaries: Non-agricultural open land with clear boundaries is accepted as collateral, expanding the options for borrowers who possess such assets to secure a secured education loan. Agricultural land and land under certain jurisdictions may not be eligible.
As there is a list of collateral that are generally accepted by banks while securing an education loan, in the same manner, there are few collaterals that are not accepted by the bank. They are –
- Agricultural Land: Agricultural land is not accepted as collateral for loans, as it is often considered unsuitable due to its specific use and legal restrictions.
- Open Land Without Boundaries: Open land lacking clear boundaries is not considered acceptable collateral, as defined and delineated property lines are crucial for evaluating and securing loans.
- In Telangana – Notary Registered Property: In Telangana, properties solely registered through a notary, rather than through official land registration processes, are not accepted as collateral for loans.
- In Karnataka – B Khata Property: In Karnataka, properties categorized as “B Khata,” indicating irregularities in documentation or compliance, are typically not accepted as collateral for loans.
- In Delhi – GPA or Leasehold Properties: In Delhi, properties with General Power of Attorney (GPA) or leasehold status are generally not considered suitable collateral due to potential legal complexities and uncertainties associated with such arrangements.
Individuals considering applying for an education loan with collateral should exercise caution and ensure they allocate ample time for the application process. Secured loans typically require an extended processing period due to the necessity for the bank to thoroughly verify and cross-check all documentation associated with the pledged collateral. Any omissions or inaccuracies in the provided documents could result in the rejection of loan applications or prolonged processing timelines. Additionally, banks conduct a comprehensive evaluation of the property being pledged, contributing to the overall time required for the approval of secured education loans.
To make things simpler, you can begin your education loan journey with GyanDhan. When you apply through GyanDhan, they take care of assessing the property and legal reports ahead of time, which speeds up the process later on. The valuation or legal report remains valid for three months to three years, so getting it done early helps in the swift processing of your education loan application. To kickstart your overseas education loan process with GyanDhan, all you have to do is check if you’re eligible for the loan here.