Personal Loan vs. Top-up Loan: Which one to choose in India

There are many financial choices in which loans play a crucial role in fulfilling immediate needs and aspirations. The most two popular loan options in India are personal loans and top-up loans. Both of them serve their respective purposes and offer several advantages making it difficult to opt for a decision of choosing one of them. This article aims to guide you through the insights of Personal Loan or. Top-up Loan, also it aims to help you make an informed choice depending upon your financial requirement and need.

Before we move on to discuss Personal Loans vs. Top-up loans, let us first understand both of them in great detail so that making a decision can become easy.

Understanding Personal Loans

A personal loan is a type of unsecured loan offered by various financial institutions, including banks and Non-Banking Financial Companies (NBFCS), to meet an individual’s immediate financial requirements. Apart from secured loans that have some security and are backed by collateral such as property or assets, personal loans are granted solely depending on an individual’s creditworthiness and upon their ability to repay. These loans come has fixed interest rates and also, predetermined repayment periods, They also provide the borrowers with the advantage of knowing their monthly installment amounts from the very beginning.

Benefits of Personal Loans

The following are the benefits of choosing Personal Loans:

• No Collateral Required: One of the most important advantages of personal loans is that they are usually unsecured loans. This means that borrowers who want to take the loan do not need to provide any collateral or security, such as property or assets, to secure the loan. This helps in the reduction of the risk for borrowers who may not have any valuable assets.
• Quick Approval and Disbursement: Personal loans are disbursed very quickly and they are known for their relatively quick approval process. Personal Loans have minimal documentation and streamlined and simple procedures due to which borrowers can receive the loan amount in the shortest time. This is useful in many cases of emergencies or urgent financial requirements.
• Flexible End-Use: Personal loans are free to use, which means they do not come with restrictions on how the loan amount or funds can be used. Borrowers enjoy the flexibility to use the loan amount for a variety of purposes as per their own will for example for funding a wedding, taking a vacation, covering hefty medical bills, or even for starting a small business.
• Fixed Interest Rates: Many lenders and financial institutions offer personal loans with fixed interest rates. In other words, it means that the monthly repayments of the loan remain consistent throughout the loan tenure. This is very helpful for borrowers as it provides them with predictable repayment schedules due to which it becomes easier for them to manage their finances.
• Tenure Options: Personal loans have a range of tenure options; generally they range from one to five years. Borrowers may opt for a tenure that matches their financial capabilities and repayment goals.

Understanding Top-Up Loans

A Top-Up Loan is essentially an add-on amount of sum provided by banks and financial institutions to existing home loans of the borrowers. It acts as an extension of the original home loan. Top-Up Loan allows the borrowers to avail of additional funds over and above the existing loan amount this can be done by fulfilling certain terms and conditions. This facility is beneficial for those who already have a home loan and have shown a good repayment track record.

Benefits of a Top-Up Loan

The following are the benefits of choosing a Top-Up Loan:

• Lower Interest Rates: Top-up loans offer comparatively lower interest rates when compared to unsecured loans such as personal loans or credit cards. Since Top-Up loans are secured against an existing asset or collateral (like a home), lenders are in a position to give better interest rates.
• Simplified Application Process: Applying and getting a top-up loan is easier than applying for a Personal loan. The documentation process required in the top-up loan process is minimal Also many lenders expressly approve the process for existing borrowers, making it a quick and easier way to secure funds.
• Flexible Use of Funds: Borrowers can use top-up loan funds for a variety of purposes depending upon their need, ranging from funding a child’s education to consolidating higher-interest debts. This makes top-up loans an attractive and lucrative option for those who are seeking to resolve multiple financial liabilities simultaneously.
• Tax Benefits: In certain cases in which the top-up loan is utilized for home renovation or improvement, borrowers are eligible for tax benefits by Section 24(b) of the Income Tax Act, 1961.
• Cost-Effective Alternative: A Top-UP Loan can be a good option for securing a sum of money as compared to availing numerous small loans or depending upon high-interest credit cards. A top-up loan also provides for a cost-effective way to accumulate larger sums of money which also helps borrowers to save on interest payments.

Meaning of a Home Loan Top-Up

While you make a firm decision regarding Home Loan top vs. Personal Loan. It is important to have the necessary information about Home Loan Top-Up also.

Home loan Top-up is an addition of an amount of money to your existing home loan. To avail top-up loan customer is under obligation to re-pay the existing home loan for at least one year or as per the loan agreement. The lender only and only provides for a home loan top-up if the borrower has furnished some security or collateral for the same.

This loan which the borrower has shown his interest to take is not restricted to be used only for reasons related to property and it can also be used to meet any financial requirement that a borrower may face. The borrower can also avail of tax benefits on home loan top-ups only in the case if the loan is utilized for his/her child’s education or home extension, renovation or improvement.

If you want to get a top-up loan, you do not need to submit any extra documents.

Also, it is pertinent to note that customers are not allowed to prepay their current house loan before they clear their existing home loan top-up.

Choosing between a Personal Loan vs. a Top-up Loan

The decision between a personal loan and a top-up loan will solely depend upon your specific financial needs. However, some of the below factors may come into the picture while deciding which one to choose:

• Interest Rates: Top-up loans usually have lower interest rates as compared with personal loans. We all know that personal loans are unsecured due to which they have a high interest rate.
  Top-up loans, on the other hand, are secured and they use your home as collateral security. Because a top-up loan is only available to current home loan clients and the bank has all of the necessary documentation it becomes safe. Also, if you pick an add-on loan in place of a personal loan, you can avail the benefit of a reduced interest rate.
• Tax Advantages: Once a top-up loan is processed, you then become eligible to claim tax benefits up to a certain amount if you use this money for your pre-defined purposes such as home renovation or home expansion. If you take out a personal loan for the above reason then you may not be able to do so. Before deciding on a personal loan, it is advisable for you to please check with your bank to confirm whether you are eligible for any tax breaks or not.
• Tenure: A top-up loan’s term is generally adjustable. Top-up loans usually have a longer repayment period than personal loans. The remaining tenure on your existing house loan often acts as the top-up loan tenure by the majority of financial institutions and lenders which makes it an excellent alternative to choose over personal loans.
• Time Required for Processing: The processing period is typically lengthy in the case of a Personal Loan. The reason for this is that it is your first time asking for a loan, and the bank is under obligation to review all of your documents carefully, evaluate your profile, and then verify the information.  On the other hand, in the case of top-up loans, the bank already has your documentation and has already confirmed your information. This helps in decreasing processing time. Usually, most banks enable their customers to apply for a top-up loan on an online mode using their respective net banking as a result of which the funds are disbursed within the shortest time possible.
• Simple Documentation: As it is already discussed, when you apply for a top-up loan, the bank will already contain all of your essential documents. This is because you have submitted them to obtain a house loan in the first place. So, if you opt for an add-on loan, the process for loan application will be simplified and less time-consuming.
  In the case of a personal loan, you are required to fill out several documents and submit numerous documents.
  Top-up loans are the best alternative to personal loans. So, before you make your decision, visit your bank and communicate with someone about the pros and cons of both kinds of loans.

Personal Loan or Top-up Loan- Which to Choose To Repay a Home Loan?

Your decision of choosing which one is best is ultimately depends on your financial situation and needs. If you already have a substantial outstanding home loan and you require funds for your property, a top-up loan may be a more suitable option for you because of its lower interest rates and longer repayment tenure. On the other hand, if you need a smaller amount and you don’t want to secure your loan against your property, then a personal loan may be a good option.

Before you make any decision, you must calculate the total cost of both loan options; you should also take into account the interest rates, processing fees, and other associated charges. Further, you should also assess your ability to repay the loan amount and your overall financial stability.

Also read our Article on Various Tax benefits on Home Loan as per the Income Tax Act, 1961 (With FAQ)

Takeaway

Deciding between a personal loan and a top-up loan to repay a home loan can be a challenging choice. This is because both these options have their respective advantages and disadvantages, and your choice should align with your financial goals, repayment capacity, and also upon the purpose for which you need the funds.

It’s recommended that you consult with financial advisors or loan experts to get a clearer picture of how both options will impact your financial situation in the long run. You can also, connect with our Experts at Legal Window in case; you need any assistance in clearing your doubt regarding Personal Loan vs. Top-up Loan.