Is Funding Your Child’s Education With a Loan Against Property a Good Idea?
Savings often form a significant part of our adult life. It is these savings that help one meet numerous expected and even unexpected financial obligations. However, regardless of the size of savings there are some financial obligations that require additional assistance, such as the higher education of your child.
More often than not, this expense can be conveniently met by taking up an educational loan. That being said, there are some instances, when it becomes exceedingly difficult to procure an educational loan. These include:
- Loan for a course, college or university that is not approved by government-appointed agencies.
- Loan for an amount exceeding 20 Lakhs.
- The desired repayment tenure exceeding 8-10 years.
In all the above-mentioned cases, an education loan fails to fulfil your immediate as well as long-term needs. In such a case, it is best to Opt for a Loan Against Property (LAP) instead. To procure this loan, all you need to do is to mortgage your property as collateral to the bank.
If the property is unoccupied or self-occupied, the bank will readily offer you a loan amount of about 50-90% of the market value of the property. On the other hand, if the property is rented out, you can expect a Loan to Value ratio of about 40-55%. You can even avail of this loan, if the property is already mortgaged, by opting for a top-up Home Loan.
Advantages of Loan Against Property for Child’s Education
Some of the prime advantages of mortgaging your property to get a loan to fund your child’s education are:
You can get an approval for a LAP rather easily. All you need is the required documents, and you can go ahead to file your loan application. Being an secured loan, in case of LAP, the lender is at a lower risk of losing their money as they can recover the amount by selling off the property pledged as collateral. This ensures that the interest rate on these loans is low. This makes it easier to obtain, as compared to education loan, which may be declined due to an array of reasons such as low income of the parent, college/university not approved by AICTE/UGC, bad CIBIL score or credit history.
Higher Loan Amount
While the loan amount for an educational loan is typically capped at 20 Lakhs, you can easily procure a higher loan amount by opting for LAP. If, for instance the market value of your property is 60 Lakhs, you can expect a loan amount ranging from 24 Lakhs to 39 Lakhs, thus making it incredibly convenient for your child to pursue their education, at a college or university in a country of their choice.
Longer Repayment Term
In most cases, banks expect a repayment of education loan within 8-10 years from the completion of course that the student is pursuing. This may not be possible, considering that it takes a substantial amount of time to find a befitting job. Besides, getting the expected salary which meets the repayment terms, may take longer than expected. Since LAP offers a longer repayment period of up to 20 years, it helps reduce the financial burden on your child.
Lower Interest Rates
The rates of interest applicable to education loans are always higher than that of Loan Against Property. Hence, LAP proves to be more cost efficient.
Flexibility of Use
The loan amount disbursed for an educational loan is often credited directly to the institution or college. As against this, in case of a LAP, the disbursed amount is handed over to you, thus ensuring that you can use it for multiple purposes, as you deem fit. Hence, if you want the additional funds to sponsor your child’s living expenses, you can conveniently do so with the help of LAP.
Limitations of Loan Against Property for Child’s Education
No Tax Benefits
While there are many advantages that a Loan Against Property entails, you must understand that you will not be eligible for any tax benefits, which is offered under the section 80E for educational loans.
Greater Interest Liability
The interest liability in case of LAP starts immediately after the disbursal of the loan amount. For educational loans however, you can enjoy an EMI free period of 6-12 months, from the date of completion of the course.
Now that you are aware of the nuances of Loan Against Property for your child’s education, we hope that you can make a better-informed decision, and enjoy reduced financial liability and numerous benefits of this cost-effective loan alternative!
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