Education loans have become the primary source of funding higher education abroad for many students. These loans help students cover various expenses associated with studying abroad. Pledging collateral for the student loan offers favourable terms. 

Many students often wonder whether they can use mutual funds as collateral for education loans. Using mutual funds as collateral can offer higher loan amounts and lower interest rates compared to unsecured education loans.

Keep reading to find out whether you can use mutual funds as collateral for education loans. We have also covered the pros and cons of using mutual funds as collateral for student loans to help you make the right choice.

Is It Possible to Use Mutual Funds as Collateral For Education Loans?

Yes, it is possible to use mutual funds as collateral for secured education loans. Collateral refers to the assets of the applicants that are pledged as security for the student loan amount. 

Lenders can offer loans against mutual fund units for students to help them cover their higher education costs. This allows students to obtain loan funds for their education without liquidating their mutual fund investments. 

Things to Consider before Pledging Mutual Funds as Collateral Security

  • The mutual funds should be owned by the applicant or the co-applicant. 
  • The loan amount offered by the lenders depends on the Loan-to-Value ratio and the mutual fund type: equity funds or debt funds.
  • Lenders sell the pledged mutual fund units if the students fail to repay their loans.
  • Lenders consider the Loan-to-Value ratio for deciding the loan amount.
  • While it is possible to use mutual funds as collateral security for education loans, most lenders do not accept them as collateral for education loans due to the high risk.

Pros and Cons of Mutual Funds as Collateral Security for Education Loans

While education loans against mutual funds seem like an attractive option, they often come with certain pros and cons. Understanding the pros and cons of using mutual funds as collateral helps you make the right decision. The following are the benefits and disadvantages of using mutual funds as collateral security for education loans.

Benefits of Using Mutual Funds as Collateral Security for Education Loans

  1. Quick Access: This is one of the major benefits of using mutual funds as collateral for education loans. Student get quick access to the loan funds without having to liquidate their mutual fund investments. 
  2. Investment Growth: As we have discussed, students can access the loan funds without liquidating their mutual funds. This means that the mutual fund investments continue to grow, even while they are pledged as collateral for the education loan.
  3. High Loan Amounts: Involving collateral security for education loans reduces the risk for the lender. This enables them to offer favourable loan terms such as higher loan amounts. Hence, lenders can offer higher loan amounts to students using mutual funds as collateral.
  4. Lower Interest Rates: As discussed, pledging mutual funds as collateral reduces the risk for the lender. Thus, education loans against mutual funds are offered at lower interest rates compared to unsecured education loans.

Disadvantages of Using Mutual Funds as Collateral for Student Loans

  1. Loan-to-Value (LTV) Ratio: Although secured education loans have higher loan limits, the loan amount offered for student loans against mutual funds depends on the Loan-to-Value (LTV) ratio. LTV ratio represents the value of the mutual funds that the lender can offer as a student loan. 
    Mutual funds generally have a limited LTV ratio of 50% to 80%, depending on whether they are equity funds or debt funds. Here’s an example that helps you understand how the loan amount of an education loan against mutual funds is influenced by the LTV ratio.
    Example: Suppose a student has pledged their mutual fund units of value ₹25 lakhs as collateral for an education loan with an LTV ratio of 60%. This means that the student can only get a ₹10 lakh education loan amount.
  2. Market Fluctuations: Mutual funds have high risk as they are affected by changes in the market conditions. This means that the market fluctuations can reduce the mutual fund's value. This ultimately reduces the students' chances of getting a higher loan amount.
  3. Limited Access to the Pledged Collateral: Students cannot access their pledged mutual funds until the education loan repayment is fully done and the loan is closed.
  4. Collateral Risk: If the applicants are unable to repay their education loans, banks can liquidate the pledged mutual fund units to recover the loan amount.
  5. Limited Availability: As discussed, mutual funds have high risk and are affected by market fluctuations. This is why most lenders do not accept mutual funds as collateral for education loans. This makes it very difficult to obtain an education loan against mutual funds.

Obtaining an education loan to fund your studies can be quite challenging, with different lenders offering varying options. Contact WeMakeScholars, an organisation partnered with over 15 public and private lenders. When you apply for an education loan through us, our experienced team will help you find the most suitable loan for your higher studies. Request a callback today to contact our team.

Eligibility Criteria for Education Loans with Mutual Funds as Collateral

The eligibility criteria for an education loan with mutual funds vary by lender. However, the basic eligibility criteria laid out by the banks for an education loan with collateral  are: 

  1. Co-applicant: Students are generally required to have an eligible co-applicant to sign the loan agreement alongside them to be eligible for a secured education loan. The co-applicant eligibility for education loans varies by bank. 
  2. Citizenship: Both the student and the co-applicants should be Indian citizens.
  3. Admission: The student should have secured admission to a recognized university.
  4. Academic performance: Students are expected to have a good academic performance of at least a 50% score in their previous academic records.
  5. Mutual Funds Requirements: Both Debt and equity mutual funds can be pledged, according to the lender. The mutual funds should be owned by the applicant or the co-applicant.
  6. Age: Students should be above 18 years for an education loan with mutual funds. However, private lenders typically don’t accept co-applicants aged more than 60 years or nearing their retirement age.

Documents Required for Education Loans Against Mutual Funds

  1. KYC Documents: 
    Documents proving the identity and address of the student and the co-applicant.:
    • A photo ID proof(Aadhaar card, Voter Id, Driving license, etc.), 
    • PAN card, and 
    • Passport. 
  2. Admission Letter:
    Students should submit an admission letter from the university proving their acceptance into the university. 
  3. Previous Academic Records:
    Students should provide their previous academic records, such as the 10th,12th, and undergraduate marksheets.
  4. Mutual Funds Documents: 
    Applicants should submit all the mutual fund documents required by their lender. 
  5. Financial Documents of the Co-applicant:
    Documents that prove the income and creditworthiness of the co-applicant are required. These documents can vary depending on whether the co-applicant is salaried or self-employed.
  6. Additional documents:
    • Lenders can also require other documents such as:
    • Passport-size photos of the applicant and the co-applicant
    • Applicable test score results, such as CAT, IELTS, TOEFL, and GRE.

Note: The above-mentioned documents vary by lender.

Conclusion

Using mutual funds as collateral for education loans allows students to get the loan without liquidating their mutual fund investments. It can offer higher loan amounts and lower interest rates compared to unsecured education loans. However, it comes with several disadvantages, as mutual funds have high risk and are affected by market fluctuations. This is why most lenders don’t accept mutual funds as collateral for education loans.

Get in touch with WeMakeScholars to get the best student loan for yourself. Our team will carefully evaluate your profile to help you find the most suitable loan according to your eligibility and manage the entire loan process so that you can have a stress-free education loan journey.