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Do I have to provide guarantors or collateral?

For loans below Rs. 4 lakh, banks may not require collateral but above that, collateral and guarantor both

Apnaloan.com Research Bureau

10 Aug 2007

You need to have a guarantor for the education loan to be sanctioned. If you fail or are incapable of repaying the student loan, the guarantor will have to clear the debt. Usually, most banks require the guarantor to have a net worth and/ or annual income equivalent or more than the education loan amount.

Only education loans above Rs 4 lakh require tangible collateral, security for the full value of the loan or third-party guarantee, depending on the amount. However, the co-borrower -- the parent or guardian - is required to furnish his/her bank account statement, tax returns of the last two years, statement of assets and liabilities and proof of income.

The usual security that banks accept are National Savings Certificates (NSCs), bonds, gold, vehicle, house, property, etc.

Loans above Rs 4 lakh and up to Rs 7.5 lakh: Collateral in the form of a suitable third-party guarantee. The bank may, at its discretion, waive third-party guarantee if satisfied with the net worth / means of the parent who is executing the document as a joint borrower.

Loans above Rs 7.5 lakh: Collateral security of a suitable value or a suitable third-party guarantee, along with the assignment of the student's future income for payment of installments.

When the education loan amount is greater than Rs 1 lakh, banks usually prefer students who have life insurance policies equivalent to, or more than, the education loan amount. This is nothing more than a security feature and also forms part of your collateral. If something unfortunate happens to the borrower, the bank does not lose money and can recover the outstanding amount from the insurance policy.

Some banks have tied up with specific institutions to provide education loans to students for select courses. In such cases, the banks may be willing to forgo collateral requirements.