A top-up loan is used by the borrower above and over the current loan, as the name suggests. The term of such loans is generally ten years. Many lenders give this form of credit to borrowers who have previously taken advantage of a home loan and have been faithfully repaying the balance for an extended period. Banks appear to exercise this vigilance to insulate themselves from any possible default on the part of the borrower.
For better understanding, suppose your bank has sanctioned a ₹ 50 lakh home loan for a 10-year term. The unpaid principal balance on your loan after five years is ₹ 34 lakhs. Now, suppose you are planning a significant renovation of the building, instead of going for an expensive personal loan. In that case, you might consider a top-up (extra amount on your existing home loan).
Read on further to know the various features, eligibility criteria of a top-up loan and its benefits.
When do you opt for a top-up?
In the following conditions, top-up loans come in handy:
- Suppose you have an existing loan and require additional money for some unexpected costs that you didn’t consider before. To be considered for extra funds, you should have paid out a defined amount of EMIs on your existing loan.
- When you need additional money and don’t want to go through the trouble of the paperwork again.
- If you need urgent money either for personal use, company use, or miscellaneous costs.
- When an individual is searching for a debt restructuring instead of handling several loans, top-up loans are also favoured.
- Lenders would only approve such a loan if you have already taken out a loan earlier and have been paying back the loan sum consistently, at least for one year or as stated in the contract. One of the most important determinants of you being eligible for a top-up loan is the track record of repayment.
- To ensure that you are financially secure, they will check your credit records and CIBIL ratings.
What are some of its salient features?
- If you have an existing loan from the same bank/financial institution, only then you would be offered a top-up loan.
- Your unpaid home loan can measure the worth of a top-up loan. Also, when calculating the sum, the market price of the collateral you pledge with the lender will be factored in. Though the percentage varies, ₹10 lakh is a top-up loan balance offered mostly.
- The top-up loan sum would also be influenced by the credit history and repayment track record of the prospective borrower.
- For various reasons, you can receive or qualify for a top-up loan. This loan will be viewed as a personal loan and used for home repair, furnishing, home decor and other criteria for emergency funds.
- The top-up loan is valid for a term of up to 20 years or up to the existing home loan’s balance tenure. The profile, salary, age, and valuation of the property of the applicant are included in this situation. The top-up loan term varies from lender to lender.
- From bank to bank, the amount to be issued as a top-up home loan varies. In comparison, the original home loan balance and the top-up loan amount should not be more than 70 – 80 percent of the value of the collateral.
- Top-up loan interest rates are available at the same rate as home loan rates. Some banks keep the top-up loan rates a few points higher as compared with the current home loan rate of interest.
What are some of its benefits?
Can be used for multiple purposes
The most significant feature of a top-up loan is that, regardless of the loan’s intent, it can fulfil a variety of purposes. A top-up loan is your ‘go-to’ service, whether it’s paying for the annual family holiday or revamping your living room.
If you already hold a home loan at the same bank, only then this kind of loan will be offered. And thus, since most of the papers already lie with the lender, there is no need for you to go through the stringent paperwork process. You will need to submit a bank statement reflecting all the records of repayment.
The tenor of such a loan can vary from 10-20 years, which is longer than the tenor of a personal loan which generally has a tenor of 1-2 years. A lender will sometimes stretch the top-up loan on the original home loan for the amount of remaining years.
The positive news is that a top-up loan counts for a tax rebate, whether you put the loan to use in renovating your home, carving a required extension like parking or spending it in the schooling of your kids, you would be deemed eligible for the rebate.
Some banks or financial institutions make it easier for you to consolidate EMIs. This means that in a single EMI, you can combine the principal loan and the top-up loan balance and pay it. This helps you to properly track your expenses when you do not have to recall different dates of payment.
Lower interest rates
Since the top-up loans are based on the criteria of your existing loan, the home loan interest rate offered is much lower than a new fresh loan.
Conclusion: For emergency cases, both a new personal loan and a top-up loan are ideal. They have no limits on their use, so when looking for immediate liquidity, people choose a top-up loan. While these types of loans with little paperwork are readily accessible, one must consider their needs and use them carefully.
Ensure that you have the means to pay off your debt promptly while ensuring that your savings rise at a steady rate as well. This helps you to relax and be in control of your financial wellbeing.