Why should you opt for a Top-Up Loan?

Updated: January, 2018

What do you do if you need a large amount of money and savings are not enough? If this expense is important to you, you would start looking at credit or loan options.

You could try for specific products like Auto loan for vehicle purchase, credit card for urgent medical expense, personal loan for travel/wedding/ home decor, gold loan etc; but a loan in any form is expensive.

So if you can not forgo the expense, the next recourse is to find a low cost loan. In this situation, if you have an existing home loan, a top up loan maybe your best option.

What is a top-up loan?

A top-up loan is additional funding that can be obtained from a bank based on an existing home loan engagement with the same bank. This is a universal loan that can be availed for meeting your personal or professional requirements (other than speculative purposes like trading in shares and derivatives ). So you can avail a top-up loan for any of the following sudden expenditures:

• Large medical expenses
• Business investment
• Higher education expenses for your child
• Marriage expenditure
• Down payment for a plot

What are the benefits of a top-up loan?

1. Improved scope for negotiating the loan amount

The basic eligibility as explained above, is that top-up loans are extended to current home loan borrowers. A track record of just 6 months or above is generally sufficient to be eligible for a top-up loan. Typically, a top-up loan or additional loan can be availed to the extent of 70% of the existing home loan. The eligibility is higher if you have been a home loan customer for a long time.  There is scope for negotiation for a higher loan amount if your income has increased over time or if a substantial part of the home loan has been paid off, therefore enhancing your overall loan eligibility.

2. Fast & Convenient

While applying for a home loan, the documents pertaining to the house property would have already been submitted to the bank in original. With timely payment of installments, you would have also established your credit worthiness. So, while applying for a top-up loan from the same bank, the steps of documentation and verification are entirely eliminated. The bank would also not need any further security to be offered.

3. Lower interest rate 

The interest rate on a top-up loan is usually higher than the home loan by about 1.5%-2%. However at an interest rate of around 11%-12.5%, a top-up loan is a cost-effective solution. The other alternatives for meeting your funding needs are a personal loan or a loan against gold or shares. These loans are usually provided by banks at higher rates ranging from 14% to 24% a year. Need-specific loans like education loans, land loans are available at lower interest rates, but the documentation requirements and the need for a guarantor or collateral makes the process cumbersome.

4. Lower EMI as compared to a Personal Loan

The tenure of a top-up loan ranges from between 15 to 20 years. The repayment tenure of personal loans are shorter ranging from 12 months to 5 years. As mentioned above, the interest rates on a top-loan is lower and compared to a personal loan. With longer tenures and lower interest rates, monthly loan installments on a top-up loan will be lesser as compared to personal loans.

Here’s an example: The EMI on a top-up loan of Rs. 10,00,000 obtained at 12% interest per annum with a tenure of 15 years works out to Rs.12,000 per month.

The EMI for a personal loan for the same amount at 24% interest and 5 years tenure works out to a prohibitive Rs.28,800 (rounded off)

What are the Tax benefits available on a top-up loan?

If a top-up loan is obtained to purchase a house property, then the interest and principle repayments are eligible for tax deductions under section 80C and section 24 of the income tax act. A top-up loan for any other purpose shall not yield any tax benefit. As is the case with any financial need, one must evaluate if the outflow is absolutely necessary and if it makes financial sense to borrow instead of using up saved funds, if any. If funds are to be borrowed to meet any special needs, a top-up loan is one of the best routes to choose. Like any financial decision, you have to compare a top up loan to your other options. You should also compare the cost of loan Vs interest you would earn if you have savings. You can take a top up from your current bank or switch your home loan to another bank and apply for top up. To calculate your savings from switch, click on the link below. Or talk to expert advisors to know your options today!