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Top-up loan v/s personal loan: What is the right option for you?

Prerna took a home loan around three years ago to buy an apartment. Now, she needs to have her kitchen redone and her living room refurnished. Funds are running low and she is not keen on dipping into her savings to pay for a renovation. Does she have an option other than a personal loan? The answer is ‘yes’. She can opt for a top-up loan on her home loan. But, should she choose it over a personal loan? Read on to find out the answer.

Top-up loan and personal loan

Banks or non-banking financial companies (NBFCs) give a top-up loan over and above an existing home loan. You are eligible for one if you have paid the equated monthly instalments (EMIs) on your home loan on time. You must also have a good repayment record or credit rating. This can be from a bank or an NBFC. For instance, Prerna took a home loan of Rs.70 lakh. She has been paying the EMIs on time for two years. In these two years, her income has risen, making her eligible for a top-up loan. So, if you have repaid a part of the home loan, you can apply for a top-up loan.

In contrast, a personal loan is a general-purpose loan. You can use it to your discretion. It could be for education, making purchases, repaying debts, home construction, or meeting any other need. Personal loans also have eligibility requirements, and you can avail one if you qualify for it. They usually have high-interest rates and shorter tenors compared to top-up loans.

What’s best? Top-up loan or personal loan?

Top-up loans are quite beneficial compared to personal loans. Here are some features of a top-up loan that makes it a better choice:

1. Lower interest rates

The interest rates on top-up loans are 1% to 2.5% higher than those on home loans and relatively lower than those on personal loans. Top-up loans are pretty cheap when you compare them with personal loans. Usually, home loans have an interest rate of 9.35% to 10.50% per annum. Personal loans have higher interest rates ranging between 12% and 24% per annum.

2. Longer tenor

It is easier to pay off a top-up loan, as the tenor is longer. You can spread out your payments over a longer period and fit it in your monthly budget. It is available for a tenor of 15 to 20 years while a personal loan’s tenor is at most seven years. Lower interest rates, coupled with a shorter tenor, translate into lower EMIs. You can use an EMI calculator to calculate these.

3. Easy approval

Since you already have a home loan, the lender will easily approve a top-up loan. This is only if you have not defaulted on the loan, and paid the EMIs at regular intervals. Personal loans can have slightly stringent eligibility criteria. They are not processed quite as quickly either.

4. Usage

You can use a top-up loan for both personal or professional needs. You can meet wedding expenses, buy a car, fund a vacation or education, and make the down-payment if you plan to buy property. Most lenders do not ask you for proof of usage. At lower interest rates and longer tenors, it is a better alternative to a personal loan.

5. Tax benefits

You also enjoy tax benefits under sections 80C and 24B on a top-up loan, provided you are using it for renovation purposes. If you use the loan for any other purpose, you will not be eligible for tax benefits.

To sum it up

No doubt, top-up loans seem like an attractive option. But, you have to remember that you should have made EMI payments for at least six to 12 months to avail one from your lender. You also cannot prepay a home loan before you pay off the top-up loan. You can avail a personal loan at any point of time and from any lender. In the end, pick an option that best suits your situation.