All About Top-up Loan


What is a Top-Up Loan?

A top-up loan is an extra loan availed by the borrower over and above the already existing loan for products, such as Personal Loan and Home Loan. If you have already taken a loan amount and you make the repayment on time, you can leverage this provision to add a certain amount to your existing loan amount. A top-up loan is usually offered to people who have a good credit score, repayment ability, and a good existing relationship with their current lender.

You can make an application for a top-up loan with the same bank or a different bank by transferring your balance amount. The rate of interest on top-up loans is generally higher than existing loan rates by around 0.25–1%. You can avail of a top-up loan for various purposes that come under the Personal Loan category, such as education expenses, home furnishing, and other emergency expenses.

KEY TAKEAWAYS

  • It is also possible to transfer your balance to another bank if your existing bank is not willing to offer you a top-up loan or if they are charging you higher interest rates.
  • As Home Loans come with some tax benefits, you can claim a tax benefit for a top-up on a Home Loan. You will be eligible for a tax rebate if you use the loan amount for a house renovation, carving a necessary extension, or a child’s education.
  • The tenure of a top-up loan is longer than the tenure of a Personal Loan, Car Loan, or Gold Loan. So, if you want a provision of a longer repayment duration, go for a top-up loan without a second thought.
  • If you choose to transfer your balance to another bank in order to avail of a top-up loan, do consider the processing fee, pre-closure charges, and difference in interest rates before you make a move.
  • A top-up loan application requires a few documents, including passport-sized photographs, address proofs, salary slips from the past three months, and proof of identity.

Features of a Top-Up Loan

Have a look at a few key features of a top-up loan to comprehend it in a better way

  • A top-up loan is offered by banks and financial institutions only over and above the existing Personal Loan.
  • If you have a good credit score and a healthy relationship with your bank, you might not have to submit any collateral to get a top-up loan amount.
  • Generally, banks offer top-up loans at the same interest rate imposed on the original Personal Loan. However, interest charges on the final top-up loan may vary basis your credit score.
  • Though the top-up loan amount limit differs from one lender to another, the quantum of a top-up loan does not exceed the total loan amount that you are eligible for after factoring in the outstanding loan amount.
  • You can avail of a top-up loan for 12 to 60 months. However, the tenure must not exceed the outstanding tenure of your existing loan amount.
  • You can avail of a top-up loan on your outstanding personal loan and utilize it for personal expenses.
  • Top-up loans are usually offered if you have already availed some loan amount from the lender. Therefore, the loan application closes quicker compared to the case when you would have applied for a new loan.

Advantages of a Top-Up Loan

Attractive Interest Rate : Though the interest rate on a top-up loan varies from one bank to another, it generally ranges between 11% and 13%. A top-up loan is usually offered at a lower interest rate than the original Personal Loan amount.

Quick Process : As the top-up loan is offered only when you already have availed a loan amount, the verification process is quicker and smoother.

No Collateral Required : For being an existing loan customer, you are not required to put up any additional security or collateral as a security against the loan amount by your bank or a financial institution.

No Restriction on Usage : The best part is you can use the top-up loan amount for any personal requirement, including a home renovation, new furniture, buying a parking space, or other personal expenses.

Disadvantages of a Top-Up Loan

Applicable to Existing Customers : The biggest drawback of a top-up loan is that only existing customers can avail of this provision. Moreover, if you are a customer with a poor track record or your credit rating is not good, you will not be able to get this facility.

No Impact on Capital Appreciation : You can avail of the top-up loan in correspondence to the outstanding loan amount. So, if your property (in the case of a Home Loan) witnesses an increment in its value, it would not have any effect on the quantum of the top-up loan, i.e. it cannot be increased by citing the value increment of the property.

No Tax Benefit : Further, if you raise a top-up loan for personal purposes, it would not provide you with any tax benefit. The tax advantage will be limited to only exclusive purposes, such as a home renovation or construction activity in the house.

When Should You Go for a Top-Up Loan?

There are a few factors that you need to bear in mind before you go for a top-up loan.

  • You can apply for a top-up loan only when a stipulated duration has passed after you have paid off a part of your original loan amount.
  • You can apply for a top-up loan only when you have an outstanding loan amount and a good track record with your lender.
  • There should not be any overdue EMI or missed EMI payments.
  • You should possess a good CIBIL or credit score, which signifies your higher credit worthiness.
  • You must also have adequate loan repayment capacity.

Interest Charges on a Top-Up Loan

Interest charges on a top-up loan may vary from one lender to another. Also, it depends on various aspects of the borrower’s profile, such as their credit score, nature of employment, loan tenure, the quantum of loan sanctioned, etc.

You can compare interest rates offered by a few leading banks in the country before you apply for a top-up loan.

Besides that, there are some key fees and charges linked with the top-up Personal Loan which are given below:

Processing Fee 0% – 6% of the loan amount
Part-payment Charges As per the loan agreement
Pre-closure Charges Up to 7% of the principal outstanding loan amount

Does a Top-Up Loan Affect Your Credit Score?

Though a top-up loan can be availed on Personal Loans, it does not leave any negative impact on your financial health. However, it may affect your CIBIL score or credit rating if you delay the loan repayment, which is again a repercussion of your inadequacy regarding the repayment of the original loan amount.

How to Decide between a Top-Up Loan vs a New Loan

Here are a few of the pointers that you must consider before you choose between a top-up loan and a new loan:

  • A top-up loan is usually availed through an existing lender, while a new loan can be sourced from both an existing and a new lender.
  • Applying for a new loan requires you to go through a documentation process all over again, while a top-up loan can fetch you immediate funding sans all the hassle.
  • You can save a lot on the interest cost of a top-up loan in comparison to a new Personal Loan. A top-up loan is usually offered at an interest rate similar to what is levied on the original loan. However, if you opt for a new unsecured loan, such as a Personal Loan, it may attract a higher interest rate due to your monthly income ratio and existing debt liabilities.
  • You can avail of a top-up loan if you have an existing Personal Loan, which is an unsecured loan. Hence, it is advised to apply for a top-up loan only when you require funds on an urgent basis.
  • Again, if you have already been making the EMI payments towards a Personal Loan, it is recommended to go for an option that keeps the payment obligations to a minimum.

Final words

A top-up loan is a provision to raise easy funds to meet your personal requirements. If you have a strong track record of repayment and a good CIBIL score, it is easier to negotiate a favourable interest rate on your personal top-up loan. However, it is crucial to delve into all the aspects of availing of an additional loan amount before you make the final decision.

Other Words

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