Need an overseas study loan? It is easier to get one from a global lender

The hitch is that they are in foreign currency and carry an exchange risk in case you want to work in India

Lucknow-based Himanshu Singh is set to begin a Masters in Finance course at the University of California, Irvine, this August. Says the 29-year-old: “I applied to a couple of Indian lenders for funding, but they took a long time to respond. One player said it would not need collateral but later changed its stance.” Singh then applied to a foreign lender called Prodigy Finance and was successful in getting a $50,000 loan.
 
Borrowing from domestic lenders not easy
 
Indian banks and non-banking finance companies (NBFC) that give foreign education loans impose a few pre-conditions. Most demand some collateral. Says Adhil Shetty, chief executive officer, Bankbazaar: “The cost of studying abroad runs into tens of lakhs of rupees, so lenders are not willing to fund an education loan without collateral, usually in the form of property. And, the property must be freehold, with no encumbrances, such as other loans or liens.” The need to provide collateral arises once the amount exceeds Rs 7.5 lakh.
 
Some domestic lenders accept financial assets as collateral. Says Naveen Chopra, founder, The Chopras, a pan-India education consulting company: “Some accept fixed deposits, mutual funds, and stocks also.”
 
Many lenders also insist on a co-borrower, usually a parent. The co-borrower acts as the guarantor who has to settle the dues if the student defaults. Since the loan amount is large, the co-borrower’s creditworthiness must be high. Many parents have been laid off, taken a pay cut, or seen a decline in their business revenue and are hence not able to act as co-borrowers.
 
According to an industry expert, “After finishing their course, students change their city when they take up a job. An Indian co-applicant makes it easier for lenders to trace the applicant.”
 
Smooth processing, less paperwork
 
When he encountered difficulties in getting a loan from an Indian lender, Singh applied to Prodigy Finance. He says: “The paperwork required was not burdensome and the loan approval came within 21 days.” Prodigy didn’t ask for collateral.
 
When a student borrows from a foreign lender, his credit history gets built in the country he has emigrated to. Says Ashwini Kumar, India general manager and vice president, Mpower Finance: “This makes it easier for him to get integrated into the new country’s financial system.” 

 
Interest rates vary
 
The interest rate can vary widely. Singh will pay a variable interest rate of 8.93 per cent. While he has borrowed $50,000, the lender has charged him a fee of $2,500. So, his loan amount has risen to $52,500. His effective interest rate on the principal of $50,000 comes to 10.22 per cent.
 
Singh is on a variable interest rate loan benchmarked to the London Inter-Bank Offered Rate (LIBOR). If the benchmark rate surges, his loan burden could get heavier. 
 
Some players also offer fixed-rate loans. Says Kumar: “Our interest rate is fixed, so students won’t have to worry about interest-rate fluctuations.”
 
Interest rates for Indian students usually range from 9 to 14 per cent. Some educational institutions have tie-ups with lenders. Says Chopra: “Students can sometimes get lower rates of around 4-5 per cent if they take a loan through their institution. The rates can be a good 3-5 percentage points lower than that charged by Indian lenders.”
 
Lenders offer discounts on the interest rate if the student sets up auto-pay, pays regularly, and crosses set academic milestones on schedule.   
 
Stringent eligibility criteria
 
Since these lenders offer massive loans without asking for collateral or a co-borrower, they set the bar high in terms of whom they lend to. Says Chopra: “The student should have got admission to a good college and good course with strong earning potential.”
 
The amount lenders are willing to offer also depends on the university and the course. They are usually willing to lend more for a STEM (science, technology, engineering, and Math) or an MBA course. Singh was offered a loan of $70,000 but availed of $50,000. Students going to study liberal arts or other courses may be offered a lower amount. 
 
MPower currently finances students heading to universities in the US and Canada, while Prodigy caters to those going to the UK and the US.
 
Be aware of the risks  
 
Since the loan amount is high, everything hinges on the student’s ability to get a well-paying job in that country. If he has to return to India and take up a job here, he could face a double whammy. A job in India may pay much less. And as M Barve, MB Wealth Financial Solution says: “You will end up paying a dollar loan while earning in rupee.” The rupee depreciates against the dollar at an average rate of 3-4 per cent annually.
 
A loan from a foreign lender also does not qualify for tax deduction under Section 80E of the Income-Tax Act.