Collateral is a term that is used to define any asset or property pledged by a borrower to a lender or loan provider as a security for a loan. Collateral works as a protective armour for the lender in a situation where the person borrowing the money fails to fulfil their obligations and defaults on the loan.
Collateral is necessary to mitigate the risk associated with lending money and it also helps the borrower in getting a loan more efficiently and quickly. A loan where security or collateral is required is called a secured loan.
What is collateral in education loan?
Now that you understand what is collateral, read what is collateral in education. Education loans to study abroad or for higher education that require security or collateral are called secured student loans. As explained earlier, a borrower who applies for a secured student loan must pledge collateral in exchange for financing. Collateral for an education loan means any movable or immovable property that is offered by the borrower to secure a loan.
Collateral for an education loan could be one of the following:
- Tangible or immovable collateral: Residential property or non-agricultural land
- Intangible, liquid, or moveable collateral: Fixed deposit or government bonds
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Why do lenders ask for collateral?
Lending institutions or banks need collateral to mitigate the risk associated with education loans. In case a student is unable to repay the education loan, the collateral is used to complete the payment for the same.
Also read: Requirements to Study abroad
Types of collateral accepted in education loans
When it comes to security, a student can offer to secure an educational loan, a house, land, fixed deposits, etc. are the options. Let us now look at the details of securities offered in education loans:
- Immovable or tangible security: A tangible or immovable security is any asset that cannot be moved to any other location. It refers to properties such as a residential house, flat, or a land/plot that is not used for agricultural purposes and possesses the ownership’s right to it.
- Liquid, moveable, or intangible security: Liquid or intangible assets do not have a physical form but they hold monetary or financial value. Liquid security refers to fixed deposits, term insurance policies, government bonds, mutual funds, licensing agreements, employee contracts, etc.
- Third-party collateral: As the name suggests, third-party collateral means collateral securities from friends and relatives. A lot of banks consider third-party collateral for education loans where a relative, parent or a family member of the student will provide collateral to the loan provider.
Related topics
If you want to study abroad and are confused about finances, then expert counsellors at Edvoy can help you find ways to make your dream a reality. Know about various types of collateral from our experts who can help secure your education loan.
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