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Loan is an easy way to borrow funds and repay later through monthly installments and is getting popular day by the day among consumers. Even after borrowing a loan, when we need more money we might find ourselves in a state of confusion, whether to borrow more or not. Whether to avail a top up loan or not? Let’s assume Shubhi took a home loan a few years ago and still servicing its EMIs periodically however she now find that her home requires further extension, renovation & improvement. To complete it, she does not need to avail another loan; she can just get a top-up loan similar to a balance top-up you get on your prepaid mobile connection.
However, one might have a thought of why to get into the trouble of modifying an existing loan and why not just borrow a new loan. This piece of information cannot be mislaid. Like any other loans Top-up loans have their own advantages and disadvantages. It depends how things are balanced in your case for you to come to a conclusion.
I am sure the thought process one goes through while considering from where to arrange the required funds is that how can the funds be arranged easily at the lowest interest rate available in the market. Isn’t it? There can be two options available – either to avail a brand new loan which comes along with a new application, evaluation, bargain and execution of complete process or avail an additional amount (top-up) on the existing loan you already have.
The options of a brand new loan can be a personal loan, a loan against property, an education loan or any such loan which one can easily avail against a collateral or even without collateral – though it will be a new loan. Contrary, the top-up loan can be availed on the existing loan – whether it is a personal loan or a home loan. Availing a top-up loan involves less documentation and easy processing as compared to a fresh loan.
The basic assumption of a top-up loan secures the borrower to avail the loan as per the new eligibility. Let’s say when you originally took the loan your eligibility was for Rs. 80 lakhs and now you have paid off Rs. 20 lakhs from the principal amount of the loan. Also, the gross income has increased during this tenure and thus the repayment capacity has also increased. Therefore, if you take a top-up on your loan now and the bank consider the borrower to award a top-up loan of at least Rs. 10 lakhs. Top-up loans are generally of two types – Top-up personal loan and Top-up home loan.
Let’s first understand top-up home loan through an example:
A guy named Abhi took a home loan 5 years ago for 80 Lakhs at an interest rate of 9% with tenure of 20 years. Since then Abhi has paid off Rs. 43,18,740 as EMIs (Rs. 71,979 per month). In this 5 year EMI amount, principal value is Rs. 9,03,506. This means that after 5 years, Abhi has paid Rs. 9,03,506 out of his 80 lakhs principal amount.
Conclusively, now Amit is eligible to take a top-up home loan of atleast Rs. 9 lakhs from his current lender for tenure of 15 years (=20-5 years), conditionally if Abhi has not taken any other loan in these last 5 years from any other Bank/ NBFC. Abhi might have to take this top-up home loan at higher interest rates depending on the current interest rates for top-up home loans. This interest rate can be higher from the present home loan interest rate or may be lower from the current home loan interest rate.
On the other hand if Abhi goes out to take a personal loan of Rs. 9 lakhs, he has to apply for a new personal loan for which the interest rate starts at 11% to 22%p.a. (as per current market trends).
Considering above figures, let’s assume that Abhi’s housing lender quotes an increase of 0.25% in the loan’s interest rate. This makes the top-up home loan interest rate = 9 + 0.25 = 9.25% for the remaining loan tenure (15 years). Let’s assume that Abhi is able to avail his personal loan at an interest rate of 13% for the tenure of 5 years.
Based on this, let’s compare the two options where Abhi avails a loan of Rs. 9 lakhs:
The above calculations are done by considering the interest rates of the loan amount remain constant throughout the loan tenure. As it can be observed from the above table that the EMI value is half in case of a Top-up home loan but the total interest paid is quite higher than that serviced in case of a personal loan. So, now it all depends on the borrower, who have to decide if he want less value EMIs and a higher interest pay-out or double the EMI value and much less interest pay-out.
As observed from the above example, the major factor due to which the top-up home loan’s total interest pay-out is through the rooftop is because of the loan which is spread across the tenure of the original home loan which is generally the case as a top-up loan runs parallel to the original loan’s tenure. As there are no prepayment charges on MCLR-linked home loans and one can easily prepay the top-up loan amount within 5 years just like one has to pay in case of the personal loan. Depending on a case, your financial institution may also consider to keep your top-up home loan’s tenure as per your choice rather than stretching it for the entire balance repayment tenure.
Based on this, let’s compare the second option where Abhi avails a loan of Rs. 9 lakhs:
As the picture is clear with the above table we can see that if the top-up home loan is repaid within the time range of a personal loan then the top-up home loan proves to be a much better option than a personal loan. The top-up loan’s EMIs and interest pay-out both remain downward of that of the personal loan.
Now, along with the top-up home loan we should also talk about top-up personal loan.
A top-up personal loan is a loan which is availed over the current personal loan you have from your current lender. This is generally not considered as an ideal borrowing since a personal loan is already an unsecured loan. If you will go to your existing Bank and ask for a top-up loan on your personal loan, the lender who is already charging you upwards of 11.25% interest rate will add atleast 1% – 5% on your existing rate of interest which is obviously extremely costly for you. So if you want to borrow a top up on your personal loan then it is suggested that you better apply for a fresh personal loan rather than opting for a top-up.
I hope with the above case studies, the circumstances when you should opt and when you should go for a new loan are clear to you and you will sensibly decide which one to opt and when.
