If you need funds on an urgent basis to meet a financial requirement and have no other means of managing your finances, applying for a loan can be the best available option to tide over a financial crisis. You can use the approved loan amount to fund a medical emergency, international travel, wedding, home renovation, debt consolidation, etc.
In such cases, you have two available options to opt for. You can either take a personal loan or a top-up loan. Each option has its advantages and disadvantages. However, they can be beneficial depending on your needs and preference.
Personal loan
A personal loan is an unsecured loan offered to salaried and self-employed individuals. You do not need to pledge anything as collateral to acquire a personal loan. Some lenders may charge up to Rs. 7500,000/- with interest rates as low as 11.99%. It serves multiple purposes, and there is no restriction on the end-use of the approved loan amount. Furthermore, you can use a personal loan calculator to determine your EMI affordability.
Top-up loan
A top-up loan is an additional loan that your lender offers. For instance, if you have an existing home loan and you borrow extra funds over and above your existing loan. Lenders offer top-up loans to customers with a higher credit history. So, if you make regular payments of your loan amount, you can go ahead and check if you are eligible for a top-up loan.
Personal loan and top-up loan comparison
Both personal loans and top-up loans have advantages and disadvantages based on your needs. Here is a comparison to help you choose a loan that you need.
Availability
A personal loan is one of the most available loans in India, as it can be availed at any time from any financial company. As with a top-up loan, you can only opt for it if you have an existing home loan from a housing finance company.
Interest rates
Since a top-up loan is a secured loan, you can avail of a lower interest rate. Your house acts as collateral in a top-up loan due to which you may save a little on interest. However, If you default on payment, the lender has all the rights to sell your property and recover the loan amount. Other than that, personal loan interest rates in India are a bit higher than a home loan due to the risks involved to lenders.
Repayment tenure
You can repay the personal loan amount within 12 to 60 months. As with a top-up loan, the maximum loan tenure can go up to 30 years or the remaining loan tenure of your home loan.
Collateral
A personal loan is an unsecured loan which means that you will not be required to pledge your assets as collateral. It is completely collateral-free. Whereas, for a top-loan, your property acts as collateral.
Loan amount
Some lenders offer up to 7500,000/- as a personal loan amount, allowing you to cater to all your financial needs, such as buying a new car, financing your honeymoon, or opting for debt consolidation. But, with a top-up loan, you can only get up to 30% of the existing disbursed home loan.
Documentation
You will need to submit the mandatory documents to secure a personal loan. For instance, KYC documents to prove your age, identity, and address. Document provings your income and credit score will also be required. A Top-up loan does not involve any documentation.
Processing Fee
The processing fee to take a personal loan can be between 0.5% to 1%. In some cases, the lender may waive off the processing. To secure a top-up loan, you will have to incur 1% of the loan value in the processing fee. However, depending on your relationship with your lender, you may be waived such fees.
Foreclosure Charge
When you plan to repay the loan amount before the end of the tenure, you will be charged a foreclosure. Your lender may or may not charge you for foreclosing your loan. If they do, it may cost between 2$ to 5% of the loan amount. In a top-up loan, no foreclosure charges are applicable.
In short
It depends on your needs and goals to determine whether a personal loan or a top-up loan is beneficial for you. It may sound a bit expensive due to personal loan interest rates in India, but a top-up loan can cost more in interest in the long run.
If you want to apply for a personal loan, use a calculator to determine your EMI affordability.