Personal Loan vs. Top-Up Loan: Know the difference

Monetary requirements are unpredictable. You never know when a medical emergency, business loss, or sudden emergency travel can hit you. These are unplanned expenses, and covering them with your savings may not always be possible. As such you might opt for a personal loan or avail a top up loan if you already have an existing loan. But which one is better for you?
 
Read on to understand how a personal loan and a top up loan can serve you. Knowing the differences will help you make a better choice.

Also Read: Are you Aware about Balance Transfer Loan?

What are Top Up Loans?

A top-up loan is a popular type of financing that allows you to borrow additional funds on top of your existing loan. You can avail this loan if you have an ongoing home, car, or personal loan. Top-up loans provide a flexible usage option, allowing you to use them for whatever purpose you see fit. 
 
This loan product's interest rate is lower than what you were paying on the primary loan product. However, you can only get them after making successful EMI payments for a specified number of months. Also, since all the paperwork was already done for your existing loan, availing this loan becomes very simple.
 

How Does a Top-Up Loan Work?

 
A top loan is available to you only if you have an existing relationship with the lender. 
 
Assume you have a personal loan of Rs 1,00,000 with a repayment term of 36 months at an interest rate of 14%. You are required to pay Rs 3,418 in EMI. You applied for a 50,000 top-up loan after 24 months. In this case, the total loan will be the outstanding amount of the ongoing loan plus the top-up loan, which equals Rs 91,016 (Rs 41,016 + Rs 50,000).
 
Now, depending on the lender's terms and conditions and the type of primary loan, you must repay the entire debt within the time frame specified in the original loan agreement. Some lenders also provide repayment convenience by allowing you to choose a new tenure. 

Features and Benefits of a Top-Up Loan

 
Top loans are ideal if you require additional funds in the middle of your existing loan repayment plan. Here are some of its benefits. 
 

1. Minimum documentation

   In a top up loan, you can skip the KYC part that includes submission of ID proof and address proof.  Your lender might ask your salary slip just to ensure your employment status.  In case, you switched your job or received an increment or promotion, you have to provide the details and furnish necessary documents.
    

2. Tax benefits

   A top-up loan offers tax benefits under certain circumstances. For example, you may qualify for a tax rebate if you use funds for home renovation, construction, or business purposes. Make sure to discuss this with your CA as well as your lender to make the most of your top up loan.
    

3. Consolidated EMIs

   You do not have to pay separate EMIs for your primary loan and the top-up loan. The lender provides consolidation benefits, allowing the combining of two separate EMIs into a single one. Consolidation improves loan management by removing the possibility of EMI skips. You can also opt for the auto-debit facility to never miss an EMI.
    

What are Personal Loans?

 
A personal loan is an unsecured financing product available for a maximum sum of Rs 5,00,000. Similar to top-up loans, you can use the funds for multiple purposes like a wedding, travelling, or during a medical emergency. 
 
Also Read: 5 Brilliant Ways to Avail a Personal Loan with a Low Credit Score
 

How Does a Personal Loan Work?

A personal loan is approved or disbursed based on your profile. The lender reviews your income, credit report, debt-to-income ratio, and employer's credibility to decide on the loan amount. 
 
You can get a low-interest loan if you work for a reputable company that hardly has any layoffs and never delays salary credit. Similarly, a debt-to-income ratio of less than 40 may qualify you for substantial funds. Simply put, if your credit profile is such that lenders believe the funds disbursed are not likely to default, your chances of receiving approval on favourable terms are very high.
 

Features and Benefits of a Personal Loan

 
Personal loans help you during difficult financial times. This loan product has some notable features.
 

1. High loan amount

   You can get this loan for the maximum sum of Rs 5,00,000. However, the minimum and maximum amount varies from lender to lender and borrower to borrower. You must check your loan eligibility with a loan eligibility calculator before applying for a personal loan.
    

2. It is an unsecured loan

   A personal loan is an unsecured loan, which means you do not have to pledge any assets in order to obtain the funds through this loan product. The lender requires you to have good credit and a steady income before approving your application. But if you do not meet the eligibility requirements, pledging your collateral can help you get your loan approved.
    

3. Flexible tenure

   Repayment tenure directly impacts your finances. It determines your EMI and the total interest you must pay on the borrowed amount. A longer tenure typically increases the interest outlay while decreasing the EMI. When you choose a shorter tenure, the opposite occurs. As a result, to assist you in balancing EMI and interest factors, the lender provides an EMI calculator to determine what tenure is best for your budget.
    

Personal loan vs top-up loan: Which one to choose?

 
Now that you understand the meaning and attributes of both of these loans, it is time to learn the difference between personal loans and top-up loans.
 

Parameters	Personal Loan	Top-up Loan
Application Process	You may apply for this loan with any lender after a thorough evaluation.	Since it is additional funds over your existing loan, you can only apply with your current lender.
Interest Rate	The interest rate is slightly higher.	Top-up loans are available at low-interest rates because you have demonstrated outstanding repayment behaviour on your primary loan.
Tax Benefits	This loan has no tax advantages.	You can claim a tax advantage if you use the funds for specific purposes.
Disbursement Time	Personal loans necessitate a completely new application and documentation, and the credit appraisal is based on several parameters, so disbursement can take a day or two.	Under a top-up loan, your documents are already in the lender's database. They only delve into your ongoing debt repayment behaviour to decide your eligibility. Hence, the disbursement is relatively quick.

 
Also Read: Can A Personal Loan Help You Improve Your Credit Score?
 

To Conclude

 
Both personal and top-up loans provide flexibility when it comes to usage. They are ideal for dealing with medical emergencies, home renovations, paying for a child's education and taking care of other urgent expenses. The main difference between a top-up and a personal loan is the documentation process, eligibility criteria, and disbursal time. Above all, the former is only available if you have an ongoing loan.