If you are in the process of applying for an abroad education loan or have already applied for one, you must be familiar with the term ‘margin money’ or ‘Loan margin’. In the beginning, when you were applying for your abroad education loan, were you aware of margin money? What is margin money? Did your bank official bother explaining this term to you? This article will give you a clear idea about how loan margin works, how it can be calculated, how students can easily misunderstand the loan margin policies of public banks, etc.
Or, you may also hear our education loan expert, Damini Mahajan give you a clear understanding of the loan margin concept and what exactly loan margin in education loan means, in the 14th episode of our web-series, Loanflixtitled, ‘Margin Money: Loan Margin in Education loan. ‘
It is very common for a beginner to misunderstand the concept of loan margin in education loan. However, since margin money is crucial to the process, it is extremely important for you to be well aware of these basic concepts. This is because more often than not, loan margin is something that is misinterpreted by students and bank officials generally do not take the trouble of explaining how loan margin works, to their applicants. In the end, it is the loan applicant who stands to lose in the resultant confusion.
Total expenses Covered by an Abroad Education Loan
Before understanding the concept of loan margin, it is very important to have an understanding of what part of a student’s total expenses is covered by a typical education loan. Although in our previous articles, we have mentioned what the term covers, we still get queries from students asking us about the same.
To put it briefly, total expenses cover your tuition fees, travel expenses, insurance, study aids like books, laptop, exam costs, and other miscellaneous expenses related to your course abroad. Now, let’s move on to understand the concept of loan margin.
Loan Margin / Margin Money
Loan margin can be defined as the percentage of money contributed by the applicant towards his total expenses. It is also defined as the ratio of the total loan amount to the total expenses.
When you approach to the bank for an abroad education loan, most of the times, they do not provide a 100% finance for your total expenses. Instead, they expect you, the applicant, to contribute a certain percentage of money towards your total expenses. For example, when a public bank like SBI states that their loan margin is 10%, what they mean to convey is that the education loan will finance 90% of your total expenses. The remaining 10% of the amount will have to be contributed by you. This 10% is your loan margin.
To understand this concept better, here’s an example. Let’s assume that your total expenses amount to Rs.10 Lakhs. In this case, the bank will contribute 90% of the amount, which is Rs.9 Lakhs and the remaining Rs.1 Lakh which is 10% of your total expenses, has to be paid by you. This Rs.1 Lakh is your margin money.
How to calculate margin money?
Most public banks set their loan margin at 10%. As mentioned before, this ideally means that the education loan from the bank will cater for 90% of your total expenses.
So, if your total expenses come up to Rs.50 Lakhs, and you apply for a loan of Rs.50 Lakhs, the education loan from the bank will cater for Rs.45 Lakhs, which constitutes 90% of your total expenses. The bank expects you, the applicant, to pay the remaining amount of Rs.5 lakhs which constitutes 10% of your total expenses.
This is how banks generally calculate the margin money. The above scenario is an ideal case, where you apply for a loan amount that is almost the same as your total expenses. However, the reality is something different. Many times, the applicants misunderstand the bank’s terms regarding margin money. How? Let’s understand this with the help of an example.
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Let’s assume that you are an applicant and your total expenses amount to Rs.50 Lakhs. However, you approach the bank saying that you only need a loan of Rs. 30 Lakhs. Assuming that the minimum loan margin offered by the bank is 10%, when you ask for a loan of only Rs.30 lakhs, the bank is under the impression that you, the borrower, would be paying the remaining Rs.20 lakhs out of the total expenses of Rs.50 Lakhs.
There is no scope for any confusion regarding the margin money if you are capable of paying the remaining amount. But most of the times, such students do not have the means to pay the remaining amount. This is one instance where there can be a misunderstanding between the bank and the student regarding margin money in education loan. Now let’s understand the general thought process of a student when he / she applies for an education loan.
What is the student’s thought process while applying for only 60% of the total expenses as an education loan in this case?
Let us try and understand why the student would have applied for only Rs.30 lakhs as education loan, while his / her total expenses amount to Rs.50 lakhs.
Most applicants are under the impression that the total expenses mentioned on their admit cards / I-20 are exaggerated and that they would end up spending only a small portion of the mentioned amount.
Hence, they only apply for the required amount as education loan. Here’s how banks interpret this action from the loan applicant’s side.
What do banks generally think when students only apply for a small fraction of their total expenses as education loan?
In the above scenario, when the student applies for Rs.30 Lakhs as education loan, the bank assumes that he / she is capable of contributing the remaining Rs.20 lakhs out of Rs.50 Lakhs.
Since these Rs.20 lakhs constitute 40% of the total expenses, which is Rs.50 Lakhs, the bank raises its loan margin from 10% to 40% for this student. This means that, according to the bank, the student is expected to contribute this margin money proportionately, as and when the banks would disburse the loan amount.
This is where a misunderstanding is more likely to happen between the loan applicant and the respective bank. The information gap about loan margin is the major cause of this confusion.
Now that you have read both, the loan applicant’s and the bank’s views on margin money, let’s try and understand the exact process behind the loan margin calculation and how banks disburse the loan amount.
How does it work?
When banks talk about margin money, their policies basically mean the following:
Loan margin is the percentage of the amount paid by an applicant towards their total expenses. So, when banks mention that their loan margin is 10%, it means that the bank’s abroad education loan will cover 90% of your total expenses. The remaining 10% of the margin money is to be paid by you, the loan applicant, towards your total expenses.
The percentage of loan margin in education loan is never fixed. The 10% margin money offered by most banks is the minimum loan margin. It means that your bank may increase or decrease your loan margin according to your total expenses and your collateral value, and this margin will not go below 10%.
Loan margin is calculated on the loan applicant’s total expenses and not on the loan amount. Moving further, let’s understand how loan amount disbursements for abroad education loans generally work. Consider the above example again.
In the example, the student’s total expense is Rs.50 lakhs and he / she has only applied for a loan of Rs.30 lakhs, which is 60% of the total expenses. Since the bank has set loan margin at 40% for this student, which is Rs.20 Lakhs, does it mean that the amount should reflect in the student’s account right away? No, the loan applicant does not have to arrange for this money immediately.
When you take an education loan, your bank mostly disburses the loan amount periodically as the students usually ask for disbursement every semester / once for a year and then second-year later. This means that if you have applied for Rs.30 lakhs as a loan, this amount mostly need not be disbursed to your loan account all at once. The loan amount from the bank is proportionately disbursed to your loan account from time to time and the student is also supposed to pay his / her contribution out of the Rs.20 Lakhs simultaneously. ie As per 40% margin, if you need 10 lacs disbursement, then the bank will ask you to put in 4 lacs first and then 6 lacs will be added by the bank, making it 10 lacs totally.
Thus, for the above example, the loan amount from the bank, along with the margin money from the student’s side will be disbursed to the applicant’s loan account in a 60:40 ratio periodically (semester-wise / year-wise).
The concept of margin money may be relatively difficult for you to grasp. Do feel free to reach out to our financial officers at WeMakeScholars to get the exact estimate of your margin money.
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What about banks that offer a 0% loan margin?
Certain public banks offer a 0% loan margin to loan applicants. Now, a 0% loan margin means that the education loan from the bank will cover 100% of your total expenses for your course duration. But does it mean that you, as an applicant don’t have to contribute anything towards your total expenses?
If the same student in the above example approaches a bank that offers a 0% loan margin, does it mean that his loan margin still remains at 0%? The answer is, it will vary. If the student still applies for only 60% of the total expenses as loan amount, his / her loan margin will still be 40% and not 0% as per the bank’s policies regarding margin money.
Is it possible to reduce the loan margin for a collateral education loan?
So how does margin money work with respect to collateral-based abroad education loans?
Let’s assume that a student has applied for a collateral-based abroad education loan. His / her total expenses amount to Rs.50 Lakhs, and he / she applies for a loan of Rs.50 lakhs. However, the value of the collateral pledged by him / her only amounts to Rs.30 Lakhs. In this case, the student’s loan margin will again go up from 10% to 40%. Is it possible to decrease this margin?
Our financial team at WeMakeScholars provides four different strategies as a solution to the above problem. These strategies can be used to bring down the margin money to even 0%. Since these strategies are the sole intellectual properties of WeMakeScholars, they cannot be shared publicly.
This information is exclusively given to students / loan applicants who apply for their abroad education loan exclusively through WeMakeScholars. So make sure that you request a callback from our financial team today to discuss your abroad education loan plans. Our team has handled many cases in which loan applicants have been confused by bank employees regarding loan margin.
In the 14th episode of our web-series, Loanflix– abroad education loans simplified, our speaker, Damini Mahajan talks about one such case in which the student was confused by his bank regarding loan margin, and how the WeMakeScholars team had to intervene in the end to set things straight.
Amongst the many terms in the abroad education loan process, margin money is something that is easily lost in translation. If you are someone who is stuck in a similar situation or would like to avoid being in such a situation altogether, we recommend you to reach out to the financial team at WeMakeScholars.
In the next article, we talk about Section 80 E of the Income Tax Act, which has a tax exemption provision for education loan applicants. So stay tuned for this next article.
Note: WeMakeScholars is an organization funded and supported by the Government of India that focuses on International Education finance. We are associated with 10+ public / Pvt banks / NBFCs in India and help you get the best abroad education loan matching your profile. As this initiative is under the Digital India campaign, it’s at free of cost. The organization has vast experience dealing with students going to various abroad education destinations like the US, Canada, UK, Australia, Germany, Sweden, Italy, New Zealand, France among others.