Secured vs Unsecured Education Loans To Study Abroad: Students Should Know Before Applying
Education Loan plays an important role in helping students to turn their studying abroad dream into reality. Education loans can be “Secured Loans and Unsecured Loans”. With rising tuition fees, living costs, and currency fluctuations, demand for education loans has increased significantly. Loans provide financial support to cover tuition, accommodation, travel, and other expenses.
Education loans cover up to 100% of total expenses. This ensures that students or their parents do not need to utilise their savings or liquidate their assets. Additionally, loans taken from recognised financial institutions are eligible for tax benefits under Section 80E of the Indian Income Tax Act.
Students can approach Nationalised or Public Sector banks, or NBFCs, for an Education loan. We will see the difference between Secured and Unsecured loans, their advantages and disadvantages, eligibility and acceptance. With this useful information, you can wisely plan the funding for your studies.
Secured Education Loan:
What Exactly Is a Secured Education Loan and How Does It Work??
Secured Education Loan is a type of loan which is granted by financial Institutions against the mortgage of some assets or property. Assets or the land/property are kept with banks or financial institutions as Collateral security for repayment. These loans are also called collateral loans.
Education Loan with collateral security is a popular option for funding, as it is widely accepted by the universities and the embassy. And a student can obtain a large amount of funds if the loan is secured against a collateral asset.
Types of Collateral You Can Use for a Secured Education Loan:
- Loan Against Property – Agricultural or non-agricultural land or house property can be kept as a mortgage for taking an education loan. Most people opt for taking an educational loan against the mortgage of their house property, as this kind of loan is widely accepted in all countries and universities.
- Loan Against Securities – This is another kind of collateral, against which banks or financial institutions give student loans. These securities can be invested in Shares, Bonds, or Debentures.
- Loan Against Deposits – In this option, the bank asks for a fixed deposit or recurring deposits, or even LIC policies or gold mortgage. Such types of secured loans are not widely accepted.
- Loan Against Third-Party Guarantee – This is a type of secured loan where a Certificate of Guarantee is provided by the employer of the borrower or any other person who becomes a guarantor for the loan.
How Much Loan Can You Get and Why Collateral Makes a Big Difference:
Secured loans comparatively offer larger amounts of loans, depending on the collateral’s value. The banks can grant loans starting from a few lakhs to 1 Crore as well. It also depends on the repayment capacity, income documents, and the bank’s regulations and rules.
Banks require collateral security, as it reduces the lender’s risk. If a borrower fails to repay the loan, it can be recovered through the mortgaged asset or property. On the other hand, it is easier for borrowers to access higher funding and favourable loan terms, repayment period, etc.
Interest Rates and Repayment Terms You Can Expect with Secured Loans:
Interest rates for secured loans are comparatively lower than unsecured ones, ranging between 9% to 14% repayment terms are flexible.
Advantages and Disadvantages of Taking a Secured Education Loan:
Pros:
- High amount of loans
- Lower rate of interest
- Flexible repayment options
- Easy approval for the borrower
- Widely accepted funding option by all the countries and universities
Cons:
- Risk of losing the mortgaged asset
- Process and documentation are lengthy
- Loan amount and eligibility depend upon the valuation of the asset
Who Should Consider Applying for a Secured Education Loan?
Secured education loans are best suited for –
- Students who aim to cover tuition fees, living expenses, and other study-related costs through one comprehensive loan
- Students who are looking for a longer repayment period
- Students who are looking for a lower interest rate
- Students typically apply to countries like Australia, Ireland, or New Zealand, where the acceptance is higher for secured loans than for unsecured ones.
Unsecured Education Loan
Unsecured loans are loans that are sanctioned without any collateral security. They are also known as non-collateral loans. These kinds of loans are granted on the basis of the borrower’s or co-applicant’s income, the applicant’s academic profile, the university he has applied and overall repayment capacity.
Key Features You Should Know About Unsecured Education Loans:
- There is no mortgage of assets or property against such kind of loans.
- These loans are sanctioned on the basis of the Applicant’s academic profile, university applied, future potential, repayment capacity, and the co-applicant’s annual income
- The rate of interest of unsecured loans is comparatively higher, varying from 11 % to 17% approximately.
- Documentation and process are comparatively faster.
Pros of Choosing an Unsecured Education Loan:
- Faster processing time
- Less documentation
- No need to mortgage any asset.
Cons You Must Keep in Mind Before Applying:
- High rate of interest
- Strict eligibility criteria
- Sanction amounts are less compared to secured ones
- High EMI
- Low flexibility in terms of repayment.
Which Students Are the Best Fit for an Unsecured Loan:
- Students who do not have property or assets to keep as collateral
- Students with a financially strong co-applicant
- Those who require loan approval quickly
- Students who require moderate loan amounts and who are showing funds in a combination of loans and their own funds.
Key Differences Between Secured and Unsecured Education Loans (Comparison Table)
| Criteria | Secured Education Loan | Unsecured Education Loan |
|---|---|---|
|
Collateral Security
|
It’s a Mandatory Requirement – Property, Deposits, or LIC policy, or other assets like Gold, shared bonds, etc can be kept as collateral. |
No Collateral security is required |
|
Rate of interest
|
Low rate of interest ranging from 8% to 11% |
High rate of interest – typically ranges from 12% to 17% |
|
Amount |
It can be in Lakhs. The Maximum can be up to 1 cr as well, depending on the valuation of collateral security.
|
Limited and a smaller amount, typically between 7 lakhs to 20 lakhs |
|
Eligibility Criteria |
Strong collateral value is required |
Requires a strong academic profile, a strong annual income of the co-applicant, CIBIL score. |
|
Processing Time
|
The processing time is longer due to a large number of documentations and property valuations |
Within 15 days, it can be sanctioned. |
|
Repayment Terms |
Flexible repayment options are available; the period can be longer, as the bank has security in terms of assets. The period can be up to 15 years. |
The tenure is shorter due to non-collateral, and it can be up to 10 years. |
Important Factors to Consider Before Choosing Between Secured and Unsecured Loans?
When it comes to studying abroad and selecting the best suitable option for an education loan, always make a comparative analysis of all the factors mentioned below, and then make a decision
- Required amount of Loan – the first and foremost factor to be considered is the amount of loan that is required to fund the expenses of studies. If you are planning to cover 100 % of your expenses through an Education loan, then the amount required will be quite on the higher side. In such cases, a secured loan is the best option.
- Rate of Interest and repayment terms – If you want flexible repayment options and longer EMI and loan repayment tenure, along with a lower rate of interest, then you must go with the secured loan, as it offers these facilities.
- Collateral requirements – Under a secured loan, one has to provide security with a bank. If you do not have a property to keep a mortgage or if you have other concerns, like the valuation of the property is not sufficient enough or papers are not clear, etc., then you should go for an Unsecured loan.
- Credit Score / CIBIL – This is another factor that can affect your decision to select the type of loan. If your credit score is higher, you can go with an Unsecured loan, whereas if it’s comparatively not that ok, then you should opt for a secured one because banks consider the value of assets while sanctioning the loan.
- ITR/Income proof – If you are looking for an unsecured loan, the income of the guarantor or co-applicant should be on the higher side; they should have a proper ITR filed every year. This is because the bank is giving a loan without any collateral. If you have strong ITR/Income, you can go with an unsecured loan. On the other hand, if the annual income is lower, you should opt for a secured loan.
Selecting a correct loan provider is also an important factor. There are different types of loan providers for studying abroad, they are – Nationalised Banks, Private sector banks, and NBFCs.
Types of Education Loan Providers (Nationalised Banks, Private Banks, NBFCs)
The mentioned table helps you to understand the key differences and select the best suitable option for you.
| Particulars | Nationalised Banks | Private Sector Banks | NBFCs |
|---|---|---|---|
|
Popular for
|
Secured loans
|
Unsecured & Secured Loans |
Unsecured Loans
|
|
Leading Providers
|
SBI, BOB, BOI, UBI
|
Axis Bank, ICICI & Yes Bank
|
HDFC Credila, Avanse, InCred and Auxilo
|
|
Maximum Loan Amount
|
1.5 Cr
|
50 Lakhs INR
|
70 Lakhs INR
|
|
Rate of Interest
|
Starting at 9.8%
|
Starting at 10.85%
|
Starting at 11.25%
|
|
Repayment Term
|
Up to 15 years
|
Up to 10-12 years
|
Up to 10 years
|
|
Tax Benefit
|
Available |
Available |
Available Only with HDFC Credila
|
What Tax Benefits Can You Claim on Education Loans Under Section 80E?
- Education loans offer tax benefits under Section 80E of the Income Tax Act.
- It allows borrowers to claim a deduction on the entire interest paid on the Education Loan.
- There is no limit on the amount of deduction; you can claim 100% of interest paid
- Deduction can be claimed for 8 Years or till the interest is fully paid, whichever is earlier
- Loan must be taken from approved banks or financial institutions, and the purpose should be purely educational
- The courses covered are UG, PG, or vocational courses from the well-known education providers.
Eligibility and Documentation Requirements for Education Loan
- Offer Letter / Letter of admission from the university
- Academic documents of the student
- KYC documents of the student and the co-applicant
- Co-borrower’s income documents – ITR / Form 16
- Co-borrower’s salary bank account statements
- Collateral Property details
- Property valuation papers
Common Myths and Misconceptions About Secured and Unsecured Loans
| Misconception | Reality |
|---|---|
|
In secured loans, there is a risk of losing the asset |
Assets are safe as long as repayments are made. Banks only take action in cases of major default (rare for education loans). |
|
An unsecured loan has no limitation
|
This is not true. There is a limit on the amount of the loan, repayment terms, and rate of interest.
|
|
Only property can be used as collateral
|
No, we can keep assets like investments, deposits, or bonds, gold, etc., as a mortgage
|
|
Interest rates are similar
|
No, Secured loans come with a lower rate of interest as compared to unsecured ones
|
|
No Documentation required for an Unsecured loan |
This is not at all true. Unsecured loans require a lot of documents like income proof of the co-applicant, their ITR, etc |
|
Unsecured loans are easy to get
|
Unsecured loans are not easy to get; they also need verification and checks on CIBIL score, repayment capacity of the borrower, ITR, etc.
|
Smart Tips to Manage and Repay Your Education Loan Without Stress
- Understand the repayment plan and structure carefully
- Create a proper financial matrix and repayment plan
- Start repaying early if possible
- Set up or enrol in autopay to avoid/missing deadlines
- Make additional/extra payments whenever possible
- Always maintain an emergency fund
- Take advantage of Tax benefits
Both Secured and Unsecured Overseas Education Loans have their own advantages and disadvantages. One should select the option wisely after checking all the pros and cons, and as per the eligibility and need.
FAQs for Secured vs Unsecured Education Loans To Study Abroad
Both have their own merits and demerits; however, it totally depends on the need and eligibility of the applicant.
Property or other assets like shares, investments, bonds, or deposits can be kept as collateral with banks.
Yes, Unsecured loans are without collateral, only they are granted on the basis of Income of the borrower
It can be up to 20-25 Lakhs
Usually not, but NBFCs may grant such loans without co-applicants.
ICICI, AXIS Bank, Union Bank, and Credila are a few examples that offer unsecured loans for abroad studies.
It is comparatively higher for a Secured loan than an unsecured one. Typically, it is between 10-20%.
Yes, scholarships or assistantships can directly reduce the margin money required for education loans.
An unsecured loan can get sanctioned within 15 days as well if the documentation and profile are perfect, whereas, secured loan processing may take 2-4 weeks time.
You should have at least one offer letter from the university to apply for an education loan.
Secured loans can be up to 1 cr, unsecured loans can be up to 20 Lakhs.
Tuition fees, Insurance, Books and other expenses, travelling cost,s and living expenses are covered under the education loan.
Yes, tax benefits (Section 80E) on interest paid for both secure and unsecured loans.
Yes, you can prepay or foreclose your education loan.
Yes, it is comparatively hard with low credits or bad civil.
No, you cannot directly convert an unsecured loan to a secured loan.
Maintain a good CIBIL Score, submit proper documents, strong annual income and offer from a good university.
Yes, Non-Resident Indians (NRIs) can get both secured and unsecured education loans from Indian banks and financial institutions.