Banks and NBFCs require collateral to reduce the risk involved in lending money. Since the students do not have a source of income or they will have to quit their job for pursuing higher education, banks keep a security which can be seized to recover its losses, in case the borrower is unable to repay the loan.
Loans can be availed without collateral from banks and NBFCs if certain criteria are met, there are a few points you should know about availing loan without collateral: -
According to guidelines set by RBI, all banks have provision to provide education loan without collateral up to INR 7.5 lakhs if the borrower has a co-signer. If you want to avail an education loan that is more than INR 7.5 lakhs, NBFCs (Non-Banking Finance Corporations) provide loans up to INR 20 lakhs without security.
Your profile matters the most if you cannot provide collateral. Banks consider your employability potential which is based on your academic record, University’s reputation, standardised test score (GRE/GMAT), co-borrower’s salary, etc. Banks will increase their limit of study loan only when they’re certain of your job stability. Banks generally provide unsecured loans above Rs 7.5 lakhs for Ivy League colleges (in case of abroad) and premier institutions like IIMs and IITs (in case of India).
Interest rate increases by 1-2% if collateral is not provided but the process of availing the loan is faster as the banks don’t have to verify the collateral.
Interest paid on Education Loans are eligible for Tax Benefits under Section 80E. But beware! Not all unsecured loans are eligible for the same.