How to get an education loan without collateral

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( — June 16, 2020) —

To get a loan from a lender, you generally must pledge security such as house property, fixed deposits, shares, bond, etc., to take the loan. This is done so that in case you default on the loan, lenders can recover it by selling the pledged security. The security pledged against a loan is termed as collateral.

However, you can get an education loan without pledging any security. The Credit Guarantee Fund for Education Loans (CGFEL) Scheme provides a guarantee for education loan dispersed by banks under the Model Education Loan Scheme of Indian Banks’ Association (IBA). Under this scheme, you can get a collateral-free loan amount for up to Rs 7.5 lakh without providing any third-party guarantee.

There is no margin requirement if you apply for a loan within this limit through a scheduled commercial bank under the CGFSEL scheme. It means that the bank can finance up to 100 percent of the loan if the loan is up to the limit of Rs 7.5 lakh. Under the CGFEL scheme you can get a loan up to Rs 10 lakh for study in India and up to Rs 20 lakh for studying abroad. But, if you take a loan of more than Rs 7.5 lakh, the bank may ask for collateral for the loan amount. The bank may also ask you to deposit margin money and seek third-party guarantee.

Can you get a collateral-free loan above Rs 7.5 lakh?

However, if your education loan requirement is more than Rs 7.5 lakh or even more than Rs 10 lakh, you can reach out to other lenders to get a collateral-free loan. Adhil Shetty, CEO, said, “Non-banking financial companies (NBFCs) and private lenders can provide you collateral-free loans for a higher amount, but these collateral-free loans are sanctioned at a slightly higher interest rate as compared to education loan taken with collateral”

Process to apply for an education loan

Before applying for a collateral-free education loan, you must know that the student is the main borrower of the education loan and parent, spouse or sibling can be the co-applicant.,

Banks generally ask for co-applicant details when you apply for a collateral free loan. Not only this, banks also ask for the income documents such as salary slips or income-tax returns (ITR) of the co-applicant before sanctioning the education loan.

In scenarios like this, companies like Prodigy Finance are of great help with their loan without collateral programs. 

Points to remember

  • All students taking education loan under the CGFSEL educational loan scheme also get one-year moratorium for repayment after completion of studies. Basically, lenders can give a relaxation of about one-year time to start re-paying the loan after you complete your education.

  • The tax deduction benefit under Section 80E of Income Tax Act for interest paid on education loans is available only when you have taken the loan from a financial institution operating under the Banking Regulation Act, 1949 or an eligible trust/institution as per the prescribed rule.

  • Generally, repayment period of education loan is 15 years. However, you should try to repay the loan amount at the earliest as tax-saving deduction benefit is available for up to 8 years only.