A top-up loan is provided by a financial institution over and above a total home or personal loan. As the name suggests, it is an additional financing option provided to borrowers with existing loans. You may opt for one in case you have an additional requirement to manage your debt. However, this facility may be offered by your lender only if you fulfil their eligibility criteria.
For example, you took a personal loan of Rs 2,00,000 from XYZ lending institution with an interest rate of 12% and a repayment period of 5 years. After two years, you wish to renovate your house, which will cost you Rs 1,50,000 more. You can approach the same lending institution and apply for a top-up loan on your existing personal loan. The lender will consider your credit score, repayment history and other factors before approving the top-up loan. If approved, you will get an additional loan of Rs 1,50,000 with a repayment period of 3 years.
Many applicants use top-up loans to pay off the pending liabilities. It may save them money in the form of attractive discounts.
Fast Processing and Minimal Documentation
Since you are opting for a top-up on your existing loan, it will be easier to undergo documentation and other formalities as it is already available with your lender. Hence, the approval process is quite faster and hassle-free for this type of loan.
Better Interest Rates
Top up loan interest rate is usually lesser than a regular loan. Hence, it can be more affordable for applicants. The personal loan rate of interest is usually higher since it is an unsecured loan. However, interest rates will differ as per the credit score of the applicant.
Tax Benefits
You can claim a tax deduction if the loan amount is used for certain expenses such as the education of your child or home renovation
What Are the Drawbacks of Taking Out a Top-Up Loan?
Strict Eligibility
Not everyone who has an existing loan is eligible for a top-up loan. Financial institutions have strict criteria for approving top-up loans, and some may require a good credit score or a certain amount of time to have passed since the original loan was taken out. Moreover, even a single EMI skip can lead to rejection.
Interest Payable
While the interest rate on a top-up loan may be lower, it still raises the interest payable amount. That means managing a top-up loan becomes challenging if you have an average income.
Repayment Period
The repayment period for a top-up loan may be shorter than the original loan, which means the borrower will have to pay off the combined loan in a shorter time frame. This can put pressure on the borrower's finances and make it tough to manage the loan payments.
Additional Fees
Some banks may charge additional fees for processing a top-up loan, such as appraisal fees, legal costs, or processing fees. These additional costs can add up and make the loan more expensive.
Collateral
Some top-up loans may require collateral, such as property or other assets, which can be a significant risk for the borrower. If the borrower is unable to make the loan payments, they may lose their collateral.
Personal loan vs Top-Up Loans: Primary Distinctions
Top-up Loans
Personal Loan
A top-up loan is a loan that can be availed by an individual who already has an existing home loan or personal loan.
A personal loan is a loan that is provided to individuals for personal use.
Some top-up loans may require collateral, such as property or other assets, which can be a significant risk for the borrower.
Personal loan can be availed without any collateral.
Approval depends upon your repayment behaviour
Approval is based on your income, age, and creditworthiness
The repayment period for a top-up loan may be shorter than the original loan.
Personal loans have a specific repayment period, usually between 1 to 5 years.
Conclusion
Top-up loans are a smart option when you wish for some extra liquidity to pay off existing debts or if you are in need to pay emergency expenses. Additionally, if your lender does not offer a top-up loan, you may seek one from another financial institution. Also, lenders offer flexibility when it comes to repayment. However, before opting for this type of loan, consider the processing fees and other commitments. Check for the interest liability with the help of a top-up loan calculator and plan your finances since you will be committing to more debt in this case. Defaults in repayment may hurt your credit score, making it difficult to manage your finances.
FAQs Related to Top-Up Loans
What is the maximum amount up to which you can avail of the loan?
The answer completely depends on your lender. Many factors such as your repayment capacity, existing liabilities, active loans, track record of debt payment, credit score and market fluctuations can play an important role in determining the maximum top up loan amount.
What is the maximum tenure up to which you can have a loan?
While it cannot exceed the tenure of the principal loan, the tenure of a top-up loan can be influenced by factors such as the amount of the loan, interest and credit score.
Is it possible to apply for a top-up loan when you have more than one loan?
Yes, it is possible. However, the approval for the top-up loan will depend on your repayment capacity and financial credibility. Just make sure to not hurt your credit score and pay the instalments on time.
Manya is a seasoned finance professional with expertise in the non-banking financial sector, offering 3 years of experience. She excels in breaking down complex financial topics, making them accessible to readers. In their free time, she enjoys playing golf.
