Education loan for abroad studies | Collateral vs Non-collateral
Taking an education loan for abroad studies is a difficult choice to make. This guide will tell you how an education loan can help, what’s the right amount to borrow, what types of loans are there, and much more. Read on!
Applying for an education loan for abroad studies is not as difficult as you might think. You are not the first person to do it and you won’t be the last. So without worrying too much, let’s read about the basics of getting an education loan, see what other students are doing, calculate how much money you might need to borrow and from whom, and figure out which type of loan is the best for you.
Once we are through with this, the hard part is over. Then, all you have to do is apply for a loan, present financial proof to your university, and apply for a student visa!
Do I need an education loan for abroad studies?
The answer to this question depends on a lot of factors. Like where you plan to study, how much you have put aside in savings if you have any liquid assets and the way you plan to manage your money while studying abroad.
But let’s not think about it all at once. It’s best to go step-by-step –
- The first thing you need to do is pick a course
- Then, shortlist the country you want to study in
- Find a few universities with a good ROI
Once you have reached this step of the process, you will be able to see how much money you’ll have to spend while studying abroad.
Now that you have this amount in hand, check if your and your parents’ savings are enough to cover more than half of your education expenses. If not, you will be needing an education loan for abroad studies.
In several cases, it will also happen that you will have this amount of money but there will still be a need to take a loan. Let’s understand why.
Why do I need an education loan?
When you apply to universities abroad and get an admit, the institution will ask you to share proof that you have enough money to spend on your studies. The kind of documents you have to show for proof will depend on which country you have applied to.
For example, when it comes to the US, you can only present bank statements about cash savings, fixed deposits, and education loan receipts.
Similarly, the US embassy only asks admitted students to share proofs of liquid assets, like gold, equity investments, provident funds, etc. This means that showing that you own a house won’t matter at all.
So, if the liquid assets you and your parents own don’t match the university and the embassy requirements, you will have to take a loan.
How do I decide how much to borrow?
Fortunately, there are a lot of ways to cover your education costs on your own. Like internships, graduate and teaching assistantships, or part-time jobs at the university. These sources can easily cover about half of your total expenses.
But to be on the safe side (like the visa officer who will be interviewing you), let’s assume you won’t have any of these sources of income. Here is how you should calculate the amount you need to borrow –
- Start with the amount you had calculated for studying abroad
- Subtract your savings (including the ones your university and embassy are ready to accept, like gold, fixed deposits, equity investments, etc.)
- Deduct the amount you have received through fellowships, scholarships, and grants
This is how much you will have to borrow when applying for an education loan for abroad studies.
To make sure it’s a reasonable amount, understand that the maximum amount of student loans for studying abroad that should be considered is equal to no more than their anticipated starting salary.
So ideally, you should try to keep your total student loan to no more than half of your first year’s starting salary.
If that’s not the case, try applying for scholarships to study abroad and see if you can reduce your debt amount.
Collateral vs Non-collateral education loan
Broadly speaking, there are two kinds of education loans you can apply for – collateral and non-collateral, also called secured and unsecured loans. Each has its pros and cons and you need to figure out which would work best for you.
What is a secured (or a collateral) loan?
When someone wants to borrow a large sum of money, banks and NBFCs ask them for some collateral in the form of property, fixed deposits, or other investments and savings. This collateral is considered as a form of security for the bank and they have the right to withhold it in case you are unable to pay the loan back.
Sure, this means that the bank needs you to present proof that you have some collateral to place. But the bright side about these kinds of loans is that the interest rate on them is low. Yes, it’s even lower than the interest on a personal loan!
What is an unsecured (or a non-collateral) loan?
Sometimes, it’s enough for a bank to know that you are going to a university abroad for your studies. They do not need any collateral and trust you to repay the loan amount (with the interest) once you graduate and start earning.
Instead of collateral, they consider documents that showcase your caliber. Like college transcripts, standardized test scores, your university admits, and the course you are planning to pursue. Once they are sure that you are more than capable of pursuing your education abroad and getting a job, they will sanction your loan. And in case they feel unconvinced, they will ask you to share papers that can prove your parents will be able to repay the loan for you.
The major benefit of taking an unsecured loan is that you will have more time to get a job after graduation and start your repayment.
But keep in mind – since the bank will not be asking you for collateral, they will charge you an interest rate that’s much higher than the one for secured loans. Moreover, you will have to pay some simple interest every month during the moratorium period, which is not true in the case of secured loans.
Now that you have an idea about the different education loan types, you can decide which one is the best for you.
Which bank is the best for an education loan?
There is no one right answer to this question. The bank you choose will depend on your personal financial situation. But let’s look at the options you have-
Public Sector Banks or PSBs, like SBI, offer low-interest rates. They’re a great choice if you have to ask for a secured loan. But remember, their document processing time is longer than the other options. So it’d be best if you applied for your loan here at least 20-25 days in advance.
The good thing about private banks like HDFC and Axis is that they offer higher amounts of loans than PSBs for unsecured loans. Unsurprisingly, their acceptance criteria are stringent and their interest rates are slightly higher. And it helps to know that their processing time isn’t as long as it is in PSBs.
NBFCs are a great option if you want to get an unsecured loan in a very short period of time. Their documentation is much more simplified than the others and their sanctioning depends only on your co-applicants income and CIBIL score. But keep in mind, their interest rates are higher than the rest.
Is there a better option for a loan?
Oh, I thought you’d never ask. Why, yes of course there’s a better option. The interest rates in your country for an education loan for abroad studies are bound to be high. And the best way to overcome this issue is to see if you have a relative in the destination country and convince them to sponsor your loan. That way, instead of paying exorbitantly high interest (like 8-12%), you would only be spending 4-5% (when it comes to the US, at least).