Students who are existing credit users and have a poor credit history indicated by a low credit score will find it difficult to get a loan approved in the first place.
Normally, when there is a doubt over the borrower’s repayment capacity, lenders may reject the loan. This can also stem from low income or trying to take a loan disproportionate to one’s income, having higher borrowing risks due to other concurrent loans, and not being able to provide collateral as required by the lender. These reasons apply to education loans as well.
In this piece, we take a closer look at why lenders can reject a student loan.
For students who are new credit users, the lender may consider looking at factors other other than their credit history. Gaurav Aggarwal, director, Paisabazaar.com said, “Lenders consider the applicant’s past academic track record, type of course, future employment prospects, post-placement repayment capacity, type and value of collateral offered, reputation/rating of the concerned educational institution and income and credit profile of parents/guardian who has stepped in as co-borrower or guarantor while evaluating an education loan application. Failure to satisfy the lenders for any of these eligibility criteria can lead to the rejection of loan application.”
Aggarwal further explains, education loan lenders usually require margin money of 5% in the case of studies in India and 15% in the case of studies abroad. Most lenders also require tangible collateral security for education loans exceeding Rs7.5 lakh. No guarantee/collateral required for education loans of up to Rs4 lakh, whereas third party guarantee may be required for education loans ranging between Rs4 lakh and Rs7.5 lakh. “Hence, those planning to avail education loans must arrange the required margin money, collateral securities or guarantor before submitting their education loan application,” he said.
Similarly, the rating of the educational institutions and courses offered may differ widely across the lenders. Credit risk assessment of the loan applicant based on his credit profile and/or his co-applicants/guarantors, too, can vary widely depending on the lenders. The difference in the credit risk assessment processes followed by various lenders can lead to a variation in the chances of an education loan’s approval or rejection.
Adhil Shetty, chief executive officer, BankBazaar.com, said, “Beyond the creditworthiness of the applicant, the loan could be rejected for technical reasons as well. For example, there are problems or errors in the application or the educational institute for which the loan is being sought does not have the necessary accreditation to UGC or AICTE, or the course isn’t eligible for financing under a lender’s terms and conditions.”
Thus, students must check the eligibility criteria for taking a loan before applying for it.
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