What is a subsidized loan?

What is loan?

When an amount or anything that holds value is lent by a lender to the borrower to be returned back after a specific time period along with an additional amount of money over and above the loan value, the amount/thing is said to be given on loan and the additional amount is called the interest. These loans can be subsidized or unsubsidized.

What is subsidized loan?

Subsidized loans are the ones in which the borrower is not required to pay the interest amount, at least temporarily. Interest either doesn’t accrue for that temporary period or is paid by a third party. This third party can be the government or any charitable organisation.

Qualification for subsidized loan

Subsidized loan is generally available to the persons who prove their financial need for the same. The agency subsidizing the loan may require you to furnish certain documents in support of your weak financial position.

Subsidized loans can be mortgage loans or student loans.

Mortgage loans are the loans available for purchase of a vehicle/ immovable property. Borrower of the loan has to give the lien on title of the property to the lender as collateral, until loan is repaid in full. The characteristics of mortgage loan are different in different countries but certain points are common to every place –

Borrower must show the financial need

 The need of the borrower must be backed by valid evidence

Lien on the property gets transferred from the borrower to the lender temporarily

In case of bankruptcy of the borrower, the lender holds a preferred position as regards the settlement of loan amount, as compared to the other creditors.

Borrower can be an individual or a business house.

Lender would be a financial institution

Student loans are the loans granted to the needy students by the government. Students are exempt from paying interest on such loans at least till their time of enrolment in school. The repayment has to start from the time the student starts earning. Again the characteristic features of student loans vary from country to country, major points being common –

• Loan are granted to financially weak students
• The needy student must furnish valid evidence in support of his need

Borrower is exempt from payment of interest on the loan till the time he is studying and the payment of loan together with interest has to be done once the student starts earning.

Difference between subsidized and unsubsidized loan?

Interest on subsidized loan is low as compared to that on unsubsidized loan

Amount of loan including interest amount in case of unsubsidized student loan, has to be repaid even while the borrower is still studying while same is not true in case of subsidized student loan.

Benefits of Subsidized loan

• Benefits to the borrower – Borrower would benefit as the loan –

Acts as a financial support

Helps borrower to gain education/vehicle/house or commercial property

Benefit to the lender –  Lender would benefit from the additional income he would get in the form of interest

Benefits to the nation – Nation as a whole would benefit as –

• It would lead to increase in literacy rate
• Standard of living of society would improve

However, there exists one limitation too – limitation as to the amount that can be taken on loan.

Due to the above benefits, individuals taking subsidized loans are on rise globally.