Choosing the Right Loan for You: Personal Loans Vs Top-up Loans

Debt, or what we often refer to as a "loan," plays a significant role in our finances and lives. Loans provide us with the means to not only manage our financial plans, such as buying a house, or vehicle, or running a business, but they also come in handy when we need money for medical expenses, educational purposes, or leisure activities. However, as much as loans act as a booster in our journey toward our goals, it is important to exercise caution while choosing the debt type, ensuring that it is the right fit for your needs.

Two such loans which are often taken by people are Personal Loans and top-up loans. A Personal Loan is an unsecured loan type that is known for offering instant cash. A reliable source of income and a good credit score guarantee the possibility of obtaining Personal Loans at competitive interest rates. Whereas, top-up loans, as the name implies, are obtained as an addition to previously existing loans, most frequently over an existing Home Loan. Depending upon the existing loan, top-up loans can be either secured or unsecured.

Understanding Personal Loans

A Personal Loan is a kind of unsecured loan that banks, NBFCs, and online lenders offer to borrowers seeking funding for their own needs. Your income, credit score, and repayment history are used by lenders to evaluate your loan eligibility. Since the advent of online lenders, it’s very easy to access online Personal Loans. All you need to do is fill in an online form, attach the Personal Loan documents required for evaluation and sit back and relax. Once the lender reviews and approves your Personal Loan documents, the loan will be transferred to your account instantly. With lenders like Poonawalla Fincorp, the Personal Loan approval process is convenient, hassle-free, and requires minimal documentation.

There are no restrictions to the end-use of Personal Loans. Unlike Business Loans or Home Loans, Personal Loans can be used to fulfil any goal or meet any financial need. You can use a Personal Loan to pay for a vacation abroad, complete house renovations, buy new furniture, pay for a medical emergency, etc.

Understanding Top-up Loans

A top-up loan is a loan taken over and above an ongoing, existing loan. The existing loan could be a Personal Loan, a Home Loan, or even a Business Loan.  There is a misconception that top-up loans are available only on existing Home Loans. That’s not true; as long as your lender has a top-up loan facility available, they can be taken over different types of loans.  Depending on the underlying loans, top-up loans can be secured or unsecured. Based on this, the specifics of the top-up loans will be set. E.g.- if the existing loan is collateral-based, the top-up loan may be given as a percentage of the value of the security. There could be certain stipulations for qualifying for a top-up loan. E.g.- the borrower should have completed a certain number of EMI payments on the underlying loan before becoming eligible for a top-up loan.

Also Read: 10 Key Points to Consider While Scaling Your Business in India

Top-Up Loan vs. Personal Loan - Which one to Opt?

 Let us discuss some key attributes that make Personal Loans and top-up loans distinct from one another:

Source of borrowing

• Personal Loan: Any lender will provide you with a Personal Loan at any time, as long as you meet the eligibility criteria and can submit the required Personal Loan documents.
• Top-up loan: It can be availed only over and above your outstanding loan from the same financial institution. If a person wants to avail of the top-up from another lender, they need to transfer their whole outstanding loan to the new lender.

Tenure 

• Personal Loan: The tenure of Personal Loans is usually up to 5 years.
• Top-up loan: The tenure of top-up loans is quite flexible and is generally aligned with the tenure of the existing loan. Thus, if your existing loan is a long-term loan, the remaining tenure for the loan is generally fixed as the tenure for the top-up loan.

Interest rates  

• Personal Loan: The interest rate for Personal Loans varies depending upon the lending institution. For eg- Poonawalla Fincorp has interest rates starting from as low as 9.99%* p.a. The interest rate charged on your loan also depends on factors like income, employment details, age, credit score, etc.
• Top-up loan: The interest rates for top-up loans depends on the underlying existing loan. The interest charged on top-up loans is usually higher by 0.10% to 0.50% compared to the base loan. E.g.- if the Business Loan interest rate is 15%, the top-up loan on this loan would carry an interest rate of 15.10% to 15.50%.

Processing period and accessibility 

• Personal Loan: The processing for a Personal Loan takes a while because the lender runs a thorough background check, which ranges from verifying Personal Loan documents, credit score, previous loan repayment history, income source stability, age, etc. Usually, a no-default borrower is preferred by lenders when lending a Personal Loan.
• Top-up loan: The processing time for a top-up loan is less as the lender already has the borrower’s history and verified documents. Usually, a regular EMI-paying borrower is preferred by banks to lend a top-up loan.

Maximum loan amount  

• Personal Loan: The amount of the Personal Loan a borrower can avail varies from lender to lender, as per their limit. However, factors like your credit score and other eligibility conditions do have an impact on the limit.
• Top-up loan: A top-up loan can be availed as a fixed percentage of the previous loan value. This stipulation could vary across lenders and the type of existing loan.

Based on this example, and the other factors discussed here, one can understand that there is no universally applicable advice for such decisions. Both loans have their advantages and disadvantages. It is on the borrower to understand which loan would best fit their set of requirements and situation.

Required Documents for Top Up and Personal Loan

There are various documents required for Top Up and Personal Loan. As a borrower, you need to submit the below-mentioned documents:

• Identity document – Aadhar/PAN card,  
• Income Proof – latest salary slips, bank statement of last three months
• Employment Proof – Official employee ID/Mail ID
• Address Proof – Rent agreement, passport, utility bill.

These documents might change from lender to lender. It is advised to check the documents on the lender’s official website to avoid any confusion and delay. 

Eligibility Criteria for Top Up and Personal Loan

While applying for Top Up and Personal Loan, you need to meet the minimum set criteria by the lender. These eligibility criteria differ from lender to lender. As a borrower, you must check all the requirements beforehand. Below are the eligibility criteria for Top and Personal Loan that you must meet:

• Age – You should be between the age of 24 and 57.
• Citizenship – You should have Indian citizenship.
• Employment – You must be a full-time employee at Central Govt, PSU, MNC, Listed, Unlisted Public Ltd, Pvt Ltd, LLP or other companies.
• Work experience – You must have work experience of at least one year with one month of stable employment at your current job.
• Monthly income – You must have a monthly income of at least Rs.30,000.

Conclusion

Hence, in conclusion, a top-up loan can provide the benefits of a less time-consuming documentation process, faster approval etc. On the other hand, a Personal Loan does not have any end-use restrictions, which can be very helpful when you have multiple needs. Choose only after thoroughly going over the lending options and your requirements.

Happy Borrowing! 

*T&C Apply. This rate may vary depending on the policies of the organization.