Is a top up loan right for you?

The need some extra cash to meet a need often arises, it may be to pay admission fees for the child’s education or undergo a surgery or for renovation the house. With the help of a top-up loan, you can avail a reasonably priced loan with minimum fuss. However this loan may not be for everyone. Find out if this is the perfect loan for you.

January 21, 2014 10:05 IST | India Infoline News Service
Rahul Ghanekar, 39 year old doctor needed some money to expand his clinic. While he was talking to one of his old patients about it, the patient mentioned the option of taking a top up loan at a very attractive rate.

A top up loan is infact one of the best options for borrowing funds at a low cost. The tenure of these can go up to 15-20 years, depending on your home loan's term. "It is offered only to existing customers. The maximum tenure could be the same as the balance repayment period.However, it is based on our evaluation," says a spokesperson from a HFC. "Usually, the total of outstanding home loan amount and the top-up loan does not exceed 70% of the property's market value.Interest rates on top-up loans are quite low when compared to personal loans. Their EMIs are low because of longer terms, while the amount you would be eligible for is higher," adds a spokesperson from a leading HFC.

The money raised from a top up loan can be used for any purpose (other than speculative activities) including education, marriage or even a holiday.

The better option
A top up loan is often the best choice for borrowing. It offers the advantage of a great interest rate, paperwork that is already done and comfortable tenure. SBI has one of the lowest rates offered for top up loans at 11.25%. Most top-up loans will attract a rate between 11.25-13% currently. If compared with other types of loans you can see why a top-up loan is a clear forerunner.

Loan type Rate of interest Repayment tenure
Top up loan 11.25-13% 5-20 years
Gold loan 11.25- 25% 1-3 years
Personal loans 15-25% 1-5 years

The main advantages of a top-up loan are a lower rate of interest, longer tenure and virtually no paperwork.

Things to watch out for

  • Even though a top-up loan can be used for any purpose, some banks like Bank of Maharashtra offer a lower rate if the loan is used for actual improvements/extension of the home. The rate is higher if it used for other purposes.
  • If you choose to pre-pay the loan, there might be hefty penalty attached to it as high as 4% in some cases.
  • Top-up loan may be available to the customer only after he has repaid specified EMIs of the original home loan i.e. the home loan should be repaid to some extent.
  • There might be processing charges and other charges which would hike up the cost of the loan.
  • Top-up loans are not suited for everyone as they are meant for people who have an existing home loan and have repaid some specified part of it.
  • The amount of loan is usually limited by the EMIs repaid.

Top-up loans may be the best choice available if you want to raise some cash for personal purposes. Do explore it before looking into other expensive options.

The author is Co-Founder & Director, CreditVidya 

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