Education Loans for Study Abroad: Collateral vs. Non Collateral

“To Collateral Or Not To Collateral?” This might literally be the question on your mind if you’re searching for an education loan to fund your graduate studies abroad.

Education loans, like most other loans, come in two options: secured and unsecured i.e. loans with and without collateral. You may already be familiar with the common definitions of ‘secured’ and ‘unsecured’ loans. However, before you proceed to consider your loan offers, it becomes really important for you to be aware of the subtle differences between either type of loan option.

What are secured or collateral-based education loans?

This type of loan requires you to pledge something valuable to your lender as security. Such valuable items would generally include property, fixed deposits, stocks, bonds, but can even include things like insurance policies and expensive items (for instance, an original Infinity Gauntlet prop or signed cricket jersey, if you own one) at times.

If you or your co-signer is unable to pay the loan, the lender reserves the right to seize your collateral and sell it to recover their income. In other words, you lose your gauntlet!

What are unsecured or collateral-free education loans?

This type of loan does not require you to pledge an asset as security to the lender. Here, the lender assesses you based on your academic profile & the financial capability plus creditworthiness of your cosigner (if required).

How can I choose?

Taking the decision to expand your horizons by studying abroad is a great one. However, taking the right loan to fund your studies is equally, if not more important. Because everyone has different circumstances and needs, it becomes a futile exercise to provide a one-stop solution to choose between collateral and non-collateral loans. In this article, we present a few evaluation criteria which you can apply while choosing between a secured and unsecured loan:

Loan Amount Covered

The total amount covered by your lender depends heavily on what kind of loan you have taken.

Universally, secured loans have higher total amounts than unsecured loans because of the added security of collateral. The difference can be huge. For instance, most secured loans tend to offer up to 1.5 Crores (or 90% of your collateral’s value).

On the other hand, unsecured loans offer up to 50 lakhs. The maximum amount offered differs between lenders and you should try approaching as many lenders as possible to get the amount that fulfills your specific needs.

While considering what loan amount you can avail, you should also know how you can use the total amount. Your loan may only cover certain expenses like tuition and ignore others like rent. If you spend on something not covered from your total amount, you may be asked to pay a penalty. Always ask the lender what you can and can’t use the loan amount for.

Visa Acceptance

It can be a huge advantage to pick one loan option over others when it comes to matters like Visa acceptance. Because of their country’s guidelines, visa officers at consulates prefer to approve documentation for students who they think have ‘proper’ funding. They do this to avoid the risk of students staying back in their country illegally after the visa has expired.

Secured loans are generally looked at as being more visa friendly especially if you're heading to the UK, Australia, or New Zealand.

But, unsecured loans are perfectly fine for more popular destinations like the US/UK.

While these are general trends, it is important to keep in mind that it is still possible for you to apply for a student visa and get approved regardless of what kind of loan you have taken.

Interest Rate

Since they are protected by the security of collateral, secured loans are generally cheaper than unsecured loans. This is because their interest rate remains lower (at around 8.5% to 9%).

On the other hand, unsecured loans come with much higher interest rates starting at 11.55% and going up to 15% (depending on the type of lender)

However, you should never compare loans based on just the interest rate. The total cost of either type of loan may still differ, because of other fees involved. Therefore, it is advisable to do a thorough check on all the fees involved and see which loan is cheaper.

Turnaround times and Moratorium

Turn Around Time is the time it takes from your application until the final disbursal of the loan amount to you. The moratorium period is the time you get before you have to start paying back your loan amount with interest.

Secured loans have higher turn around-times & lengthy documentation for evaluation of the collateral. This documentation involves checking the value of your collateral and sometimes even its legality (not every lender knows how valuable an original Infinity Gauntlet prop is xD). Also, secured loans tend to have longer moratoriums (When a lender finds out how valuable your collateral is, they’ll be very willing to give you time to pay back).

In turn, it takes less time to process unsecured loans because the paperwork is minimal. If you’re looking for a loan without documentation, an unsecured loan is the closest you can get! But unfortunately, unsecured loans don’t give you longer moratorium periods to pay back.

How to make a decision?

Neither collateral-based nor collateral-free loans are good or bad. They are just different. And picking one option over the other requires research and in most cases, expert advice. Research and compare your options!