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As buying a long-term asset needs heavy investment, it may not be possible for most people to pay the entire amount out of his/her pocket. So, to buy a house people generally depend on home loans. Apart from lower interest rates compared to unsecured loans like personal loans, a home loan also provides tax benefits, which also encourages buyers to take loan.
Similarly, auto loans or other such loans taken to buy long-term assets also come cheaper than unsecured loans.
In case the loan taken to buy a long-term asset falls short, the borrower may need to borrow additional money to bridge the gap. Such a borrower would have two options – either to take a top-up loan against the existing loan, or take a personal loan.
The interest on a top up loan is generally comparable to the interest against the original long-term loan and doesn’t need additional paperwork, but is hard to get sanctioned. On the other hand taking a personal loan may be expensive, but easier to take.
“A personal loan is an unsecured loan that can be availed by any individual, whereas a top-up loan is a kind of secured loan which can be availed only by an existing home loan borrower,” said Pranjal Kamra, CEO of Finology.
“Due to the relatively lower interest rate structure and flexible loan tenure, top-up loans are a better alternative to a personal loan. A top-up loan can be taken for a maximum tenure of upto 30 years or the remaining period of your existing home loan, while a personal loan is offered for a maximum of five years. Additionally, if you are taking a loan for home renovation or home extension purposes, a top-up loan would offer various kinds of tax incentives which are not available in the case of personal loan,” he added.
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“However, not every home loan borrower is offered a top-up loan facility. Only individuals with good payment history and good credit score can get the loan sanctioned for top-up loan,” Kamra further said.
Comparing the two loans, Abhishek Soni, CEO & Founder of Upwards said, “It’s important to understand the difference between a top-up loan and a personal loan before availing either one. A top-up loan, as the name recommends, it is like a booster loan given to an existing borrower. A top-up loan is generally preferred over the personal loan as the interest rate is often relatively lower as compared to personal loans. Moreover, considering that the lender would already have your KYC details/documents, the processing of the loan will be faster and easier. Besides this, even the tenure for a top-up loan is longer, which can result in a lower Equated Monthly Installment (EMI), making it a better option among the two.”
Talking on the advantages of top-up loans, Anil Pinapala, Founder & CEO of Vivifi India Finance Private Limited said, “Under the current circumstances, when there is less credit available in the market a top-up loan has its advantages. As the consumer typically does not need to provide fresh documentation for the top-up loan and as it is with their existing lender, they might be able to attract a better interest rate.”
Pointing out the drawback of a top-up loan, Pinapala said, “However, if the top-up loan is on an existing secured loan like an auto or home then it increases principal owed and thereby reduces the equity. This would also mean if one is trying to sell a vehicle, purchased by taking auto loan, the borrower would have to first clear the top-up loan as well, which would not be the case if the customer had accessed a new personal loan.”
Critically analysing the two types of loan options, he suggests, “So, the answer to this question depends on what the need of the consumer is, if the need is short-term or long-term and also depends on how quickly they need their funds. However, in all cases I would advise any potential borrower to always shop and get quotes from various lenders and make an informed decision if a personal loan from a new lender is better or a top-up loan from an existing lender.”