What is the Concept of Top Up Loan and Should You Avail It or Not?


Taking a loan is not a new thing today. Every person has some loan or the other in their names. It is the easiest way to borrow funds and repay through monthly instalments. It allows you to procure and use the assets you purchase with the help of the loan.

You have taken a Home Loan about six years ago and are servicing the EMIs (Equated Monthly Instalments) on time. You have paid a significant proportion of the principal amount in the bargain. The value of the property has increased and so have your income and repaying capacity. You can approach your bank for a top-up Home Loan to carry out repairs and renovations to your property. Depending on your repayment record, you can have access to such top-up loans. This concept of the top-up loans is becoming a trend today.

Which is the better option? The top-up loan of a fresh loan

It depends on your requirements and the situation. The Top-Up loan concept has its advantages and disadvantages. Let us now explore the concept in detail and see whether the top up loan is a viable concept or not.

Advantages of taking a top-up loan

  • Since you are an existing borrower, the bank does not have to do fresh KYC. Remember, you get top-up loans over and above the existing loan.
  • The banks do not have to go for fresh collateral in case of Home Loans as the existing property can suffice for the fresh top-up facility as well.
  • The documentation involved in a top-up loan is less as compared to taking a fresh loan.

Disadvantages of a top-up loan

  • The rates of interest in a top loan are always higher than the current loan. In case of Home Loans, it can be high by 0.75% to 1.25%. In the case of top-up Personal Loans, the rates of interest can differ by 1% to 5%.
  • The banks have to do the new eligibility checks before approving a top-up loan. In case you have higher eligibility, and the bank approves a higher limit, you have to create a new charge (in case of a top-up home loan).

Different types of top-up loans

Usually, top up loans are available in only two products, Home Loans and Personal Loans. In the case of the Home Loans, your repayment schedule does not change in the ordinary course. The repayment schedule coincides with that of the original Home Loan. The Personal Loan Options are different. You get a new repayment schedule that extends over and above the existing repayment tenure.

An example can make things clear

Ramesh availed a Home Loan of Rs. 40 Lakhs @ 8.5% for 20 years in 2008. He has repaid the instalments (Rs. 34,713 as EMI) on time, and the present outstanding is Rs. 28 Lakhs. Ramesh has earned a couple of promotions during the intervening period and has a higher income today as compared to 2008. He needs an amount of Rs. 15 Lakhs to repair and renovate his home.

Considering the above situation, Ramesh is eligible to take a top-up Home Loan of Rs. 15 Lakhs. The repayment schedule does not change. However, the banks stipulate a higher rate of interest (say 0.75% more than the existing rate). Hence, Ramesh has to pay an additional EMI of Rs. 19,205 for the top-up loan for 10 years.

In case, he had gone for a fresh Personal Loan, the rate of interest would have been 14.5% with an EMI of Rs. 35,292 for 5 years. Therefore, it is beneficial for Ramesh to opt for a top-up loan. In the present day era of the MCLR (marginal cost of funds based lending rate) concept, Ramesh can choose to repay the top-up Home Loan within 5 years. Under such circumstances, the EMI would be Rs. 31,320. You can see that it is still beneficial for him to go for the top up loan option.

Consider this example for a personal top-up loan

Sneha had availed a Personal Loan of Rs. 5 lakhs @ 13.5% in 2016. She has paid all her EMIs (Rs. 11,505) up to date. The balance outstanding on the personal loan is Rs. 3.39 Lakhs. She is eligible for an additional Rs. 1.60 Lakhs as a top-up Personal Loan. However, the banks stipulate a higher interest rate of around Rs. 15.5%. Hence, the additional EMI burden comes to approximately Rs. 3,849 for 5 years. She has the option of going for a fresh Personal Loan @ 13.5%. In that case, her EMI would be Rs. 3,682. Now, you can see that the Personal Loan top-up is an expensive proposition because she can Avail Cheaper Personal Loan Options. Hence, it is better to avoid going for a top-up loan.

The answer to the question

You can avail a top-up loan if you feel you can make the EMI repayment conveniently. Also, if you have a Home Loan and a Personal Loan, it’s better to avail top-up on Home Loan as it comes at a lower rate of interest.

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