Secured vs Unsecured Education Loan for Abroad Studies

The surge in the number of students studying abroad has been remarkable, with a 68% increase from 444,553 students in 2021 to 750,365 students in 2022. This rise can be attributed to the exposure and career opportunities that studying at international universities can offer. However, pursuing education abroad comes with a hefty price tag that may be challenging for many students to afford. In such circumstances, education loans for studying abroad serve as a lifeline. Having a comprehensive understanding of the loan process and its various aspects is crucial to ensure that you make informed decisions. Since an education loan is a long-term commitment, knowing these products can significantly influence your future financial aspirations. The first step towards understanding it is knowing the types of education loans for abroad studies.

Types of Abroad Education Loans

Education loans for studying abroad are commonly classified into two categories based on the security provided by the applicant. While most lenders offer both types of loans, certain lenders may specialize in one type over the other, depending on the specific loan category. They are -
 

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  Secured education loan: loan with collateral

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  Unsecured education loan: loan without collateral

Secured Education Loans for Abroad Studies:

A secured education loan, also known as a loan with collateral, asks the applicant to pledge collateral. For education loans exceeding a certain amount, such as INR 7.5 Lakhs, lenders like public banks (UBI, and more) require collateral as security. These secured education loans have lower interest rates and are comparatively easier to obtain due to the reduced risk for the bank.
 

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  The collateral can take various forms, including immovable property, fixed deposit (FD), and LIC insurance policy, among others.

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  The approval process for this type of loan is typically longer as the bank needs to verify all the documents related to the collateral being pledged. 

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  Additionally, these loans have higher chances of approval, with parental income not being a determining factor. 

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  Overall, secured education loans provide a viable option for financing higher education, offering favorable terms and increased approval possibilities, albeit with a more thorough verification process.

Borrowers can basically pledge two types of collateral when applying for a secured education loan. They are as follows:
 

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  Tangible Assets - this includes real estate assets such as houses, flats, etc. Kindly note that agricultural land or land that falls under the jurisdiction of gram panchayat is not accepted as collateral by lenders. However, non-agricultural open land that has clear boundaries is accepted as collateral for secured education loans.

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  Intangible Assets - this includes liquid securities such as fixed deposits, mutual funds, ULIPs, Life Insurance policies, government bonds, etc. Borrowers can pledge an old or open a new fixed deposit for an education loan. However, the fixed deposit holder will continue to get any interest received on these intangible assets.

Did you know that UBI is the only public-sector bank that may accept Gram Panchayat property in some cases for abroad education loan?

Advantages of Secured Education Loan:

There are several advantages of taking a secured education loan.
 

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  The loan amount that you can get will be considerably higher. 
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  The interest rate will be lower. 
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  May get a free moratorium period.
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  Can target any college or university and country.
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  Longer repayment period

Unsecured Education Loan for Abroad Studies:

Unsecured education loan or loan without collateral provide a financing solution for students who do not have collateral to pledge. However, it is important to note that unsecured education loans typically have higher interest rates compared to secured loans and may be more challenging to obtain approval for.

Unlike secured loans, unsecured education loans have a shorter repayment period and often require partial repayments to be made during the study period. Additionally, these loans typically mandate a minimum co-applicant income, ensuring a reliable source of repayment as collateral security is absent. The loan sanctioning decision is often based on the co-applicant's income and CIBIL score.

Advantages of Unsecured Education Loans

A few of the advantages of unsecured education loans are -

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  Swift processing time, as the paperwork involved is relatively simplified.
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  There are some options in this type of loan in which you do not even need a co-applicant. 
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  In a few cases, the loan processing fees are included in the loan amount itself. 

Secured Loan vs Unsecured Loan 

To understand the basic difference between secured and unsecured education loans a comparative table has been presented below:

Collateral vs Non-collateral: Which type of education loan is best?

Both types of study loans have their merits and drawbacks. That said, if you have suitable collateral, secured loans are a safer and better alternative because they charge a lesser interest rate, which saves money in the long run. The loan quantum can get as much as INR 1.5 Crore as a loan. You cannot get such a high amount of loan without collateral property. On the other hand, the loan amount that is required is less like up to 50 Lakhs but if you do not have collateral to pledge then in this case going for an unsecured education loan will be better. Having a proper budgeting process will help you to make the repayment effectively.

Top Lenders for Secured and Unsecured Education Loans to Study Abroad

There are broadly 3 categories of lenders available that borrowers can choose from when planning to take an education loan. These lenders include private and public banks, NBFCs, and international lenders.

Lender providing secured abroad education loan:

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  SBI (public sector bank)
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  UBI (public sector bank)

Lenders providing unsecured abroad education loan: 

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  Axis Bank (private sector bank)
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  ICICI Bank (private sector bank)
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  IDFC FIRST Bank (private sector bank)
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  Avanse (NBFC)
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  Auxilo (NBFC)
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  Incred (NBFC)
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  HDFC Credila (NBFC)

Lenders providing unsecured abroad education loan (without co-applicant): 

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  MPOWER Finance (International lender)
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  Prodigy Finance (International lender)

A comparative analysis has been done between different types of lenders that give secured and unsecured education loans.

SI - Simple Interest, PSI - Partial Simple Interest, EMI - Equated Monthly Installment

Which Lender to Choose?

Now, choosing the best lender can be challenging as it depends on your specific requirements. Let's explore the process using situational examples.
 

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  For instance, if you plan to pursue a master's degree in the USA and have collateral to pledge, opting for an education loan from public sector banks would be advantageous. Compared to other lender types, these banks offer lower interest rates, as indicated in the table above. Additionally, they provide higher loan amounts, making it a favorable choice. Moreover, you can benefit from tax advantages, which will help you save on costs.

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  If you lack collateral but have a financially strong co-applicant who meets the minimum income criteria, private sector banks can be a viable alternative to consider. The reason for this choice is that they tend to offer more favorable interest rates compared to NBFCs and international lenders, though slightly higher than public sector banks. Additionally, private banks generally have shorter processing times and lower processing fees. In some cases, they may even provide loans without requiring a margin, which was typically challenging with PSBs. Furthermore, their ability to offer tax benefits and reasonable repayment options makes them a superior option over NBFCs and international lenders.

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  If you do not meet the eligibility criteria of private banks, NBFCs can be a suitable option as they tend to be more flexible in their requirements. Fulfilling all the eligibility criteria with NBFCscould allow you to secure a loan of up to 75 Lakhs, with a slightly higher interest rate compared to the previous lending choices.

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  In cases where you lack a financial co-applicant and need a loan, international lenders can come to your rescue. However, to avail this option, you must ensure that your target school is on their approved list. Although international lenders may have higher interest rates, the advantage of not needing a financial co-applicant balances it out. It's worth noting that there are no tax benefits with international lenders, and the loan you obtain from them will be in USD. 

How to Apply for Abroad Education Loan?

Securing an education loan can be a straightforward proc