Top-Up Loans and How Can They Help You

A top-up loan is provided by a financial institution over and above a total home or personal loan. As the name suggests, it is an additional financing option provided to borrowers with existing loans. You may opt for one in case you have an additional requirement to manage your debt. However, this facility may be offered by your lender only if you fulfil their eligibility criteria.

For example, you took a personal loan of Rs 2,00,000 from XYZ lending institution with an interest rate of 12% and a repayment period of 5 years. After two years, you wish to renovate your house, which will cost you Rs 1,50,000 more. You can approach the same lending institution and apply for a top-up loan on your existing personal loan. The lender will consider your credit score, repayment history and other factors before approving the top-up loan. If approved, you will get an additional loan of Rs 1,50,000 with a repayment period of 3 years.

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• Applicant must be an Indian citizen and fall within the age range as required by the lender
• Existing relationship with the lender
• Good credit score
• History of clean track record of instalment repayment
• Stable income to prove your repayment ability
• You must have repaid a portion of your existing loan, as stipulated by the lender
• Documents, as required by the lender
• Any other specific requirement to be fulfilled by your lender

Needed Documents

• KYC documents including photographs of the applicants for identification and address.
• Income proof: Salary certificate or business income proof for self-employed applicants.
• Duly-filed ITR returns of the past three years.
• Top-up loan application form.
• Bank account statements.
• Business address proof.
• An account of personal assets and liabilities.
• Documents of the guarantor, in case the lender asks for one.

Also Read: How Personal Loans Help During An Emergency

Benefits of Top-Up Loans

• Pay off Existing Debts

  Many applicants use top-up loans to pay off the pending liabilities. It may save them money in the form of attractive discounts.

• Fast Processing and Minimal Documentation

  Since you are opting for a top-up on your existing loan, it will be easier to undergo documentation and other formalities as it is already available with your lender. Hence, the approval process is quite faster and hassle-free for this type of loan.

• Better Interest Rates

  Top up loan interest rate is usually lesser than a regular loan. Hence, it can be more affordable for applicants. The personal loan rate of interest is usually higher since it is an unsecured loan. However, interest rates will differ as per the credit score of the applicant.

• Tax Benefits

  You can claim a tax deduction if the loan amount is used for certain expenses such as the education of your child or home renovation

Also Read: 6 Foolproof Tips That Can improve Your Personal Loan Application

What Are the Drawbacks of Taking Out a Top-Up Loan?

1. Strict Eligibility

   Not everyone who has an existing loan is eligible for a top-up loan. Financial institutions have strict criteria for approving top-up loans, and some may require a good credit score or a certain amount of time to have passed since the original loan was taken out. Moreover, even a single EMI skip can lead to rejection.

2. Interest Payable

   While the interest rate on a top-up loan may be lower, it still raises the interest payable amount. That means managing a top-up loan becomes challenging if you have an average income.

3. Repayment Period

   The repayment period for a top-up loan may be shorter than the original loan, which means the borrower will have to pay off the combined loan in a shorter time frame. This can put pressure on the borrower's finances and make it tough to manage the loan payments.

4. Additional Fees

   Some banks may charge additional fees for processing a top-up loan, such as appraisal fees, legal costs, or processing fees. These additional costs can add up and make the loan more expensive.

5. Collateral

   Some top-up loans may require collateral, such as property or other assets, which can be a significant risk for the borrower. If the borrower is unable to make the loan payments, they may lose their collateral.

Personal loan vs Top-Up Loans: Primary Distinctions

Top-up Loans	Personal Loan
A top-up loan is a loan that can be availed by an individual who already has an existing home loan or personal loan.	A personal loan is a loan that is provided to individuals for personal use.
Some top-up loans may require collateral, such as property or other assets, which can be a significant risk for the borrower.	Personal loan can be availed without any collateral.
Approval depends upon your repayment behaviour	Approval is based on your income, age, and creditworthiness
The repayment period for a top-up loan may be shorter than the original loan.	Personal loans have a specific repayment period, usually between 1 to 5 years.

Conclusion

Top-up loans are a smart option when you wish for some extra liquidity to pay off existing debts or if you are in need to pay emergency expenses. Additionally, if your lender does not offer a top-up loan, you may seek one from another financial institution. Also, lenders offer flexibility when it comes to repayment. However, before opting for this type of loan, consider the processing fees and other commitments. Check for the interest liability with the help of a top-up loan calculator and plan your finances since you will be committing to more debt in this case. Defaults in repayment may hurt your credit score, making it difficult to manage your finances.

FAQs Related to Top-Up Loans

• What is the maximum amount up to which you can avail of the loan?

  The answer completely depends on your lender. Many factors such as your repayment capacity, existing liabilities, active loans, track record of debt payment, credit score and market fluctuations can play an important role in determining the maximum top up loan amount.

• What is the maximum tenure up to which you can have a loan?

  While it cannot exceed the tenure of the principal loan, the tenure of a top-up loan can be influenced by factors such as the amount of the loan, interest and credit score.

• Is it possible to apply for a top-up loan when you have more than one loan?

  Yes, it is possible. However, the approval for the top-up loan will depend on your repayment capacity and financial credibility. Just make sure to not hurt your credit score and pay the instalments on time.

Also Read: Availing Personal Loans Just Became Super Easy with Digital Lending
 
Disclaimer: This post was first published on 21st April and has been updated for the latest information, freshness and accuracy.