Top Up Loan Explained: A Top Up Loan is a loan that is given by the bank to an existing borrower who already has taken a home loan from the bank. These loans are not given for a particular purpose and can be used by the borrower as per his needs. These loans are available to the home loan borrowers after a few years of the original loan. This allows the lender to assess the repayment behavior of the borrower and then decide accordingly if they want to lend further to him/her. This is also due to the fact that after repaying the loan for a few years the liability of the borrowers decreases and thus he can use the margin to borrow if he/she so requires.
A Top up loan could be used to repay existing expensive loans, for medical emergencies, education purpose, renovating or decorating a house, for marriage of a loved one and so on.
Why are top up loan useful in emergencies: So what makes top up loans so useful in emergencies. Here are a few aspects that make these loans an option worth considering if you need funds for an unforeseen event.
Advantages over other methods of borrowing: Usually personal loans are the preferred choice when one is looking for funds for miscellaneous purposes. Interest for top up loans is usually 1.5% to 2% more than home loans but if you still compare it to that rate at which personal loans are available, top loans are less expensive. Loan against Property (LAP) is also more expensive than a top up loan. Personal loans are available for 5 to 7 years, gold loans for 1 to 3 years and loan against deposits will depend on the remaining tenure of the investment, while a top up loan could be availed for 15 years to 20 years depending on the remaining home loan tenure. A longer loan period lowers the EMI burden for the borrower. If you compare it to loan against securities then you realize borrowing against securities is unpredictable as the value of securities may change as per market conditions.
Quicker and Easier Processing: Emergencies arrive unannounced. Quick and easy access to funds is paramount when dealing with an emergency; if the processing takes too long then the purpose of borrowing may be defeated. Again since the person is already dealing with a stressful condition he/she may not be very happy to deal with cumbersome documentation process and frequent visits to the lender. Since the applicant seeking the top up loan already has a relationship with the lender (existing home loan), the processing will be fast, easy and hassle free. The most important factor here for assessing the applicant would be the home loan repayment record and the loan application would be accepted or rejected based on that.
Can Be Used for Any Purpose: Another feature that makes top loans useful during emergencies is their versatility in use. You are not given the loan for a specific purpose thus their use is not restricted. So without specifying the reason or worrying whether the loan is available for a particular purpose or not you could seek a top loan. So these loans could help you in a medical emergency, help a loved one get married or fund education when education loan is not available or sufficient.
Top up loans though useful must be taken after due diligence. So if you have a home loan make sure that you service it well, you pay all your EMIs on time as this existing loan could offer you a lifeline in an emergency. Not treating your existing debt responsibly as always ruins your chance of getting further credit.
The author is Co-Founder & Director, CreditVidya.