Oct 312016
 

Top Up Loans or Personal Loans – Which One is Better?

We all dream. We dream of having a house of our own, a car, or other stuff. We often dream of foreign tours and more. But all these require money. Sometimes a lot of money! But or saving may not always help us to achieve our dreams. That’s where loans come in handy. They provide just the right amount of extra push required to get to our dreams.

Top Up Loans or Personal Loans – Which One is Better?

There is a problem however. The loan market is flooded – flooded with a long list of lender and each lender offering a long list of loan variants. This makes life a bit difficult. How so? Choosing a loan product that is most suitable can become really difficult. It becomes even more challenging when you are not aware of the what products are really available. One such loan product which is not much heard about is the Top Up Loan. On the other hand, however, you have heard of personal loans a lot.

Now the question here is, ‘which one should you opt for – Top Up loan or Personal loan?’ The answer to this question isn’t easy. In order to understand which one is better, we need to first understand the concept of Top Up loans and Personal loans. Once we understand that, we will take a tabular look at the difference between the two variants and then we will be in a position to state which one is better. Sounds good?

But let us warn you. This article is going to be a bit long and hence, stay with us throughout. Once you finish reading this article, you should be able to decide which works best for you.

Top Up Loans – A Quick Overview

Understanding the concept

What does the name Top Up loan suggest to you? You have already come across the concept in terms of mobiles. Since you use mobile you know how prepaid connections work. You need to recharge your account and then only you can use it. Now usually when you are using a prepaid phone, you set a monthly budget. There are times when you need to make more calls than usual. That is when the balance runs out quickly and your monthly budget limit crosses. What do you do next? Do you recharge your entire account with the same budget for the remaining few days of the month or do you use a small recharge to cover the remain days? Usually it is a smaller recharge, right? That amount is called Top Up amount.

In case of Top Up loan, the concept remains the same. You already have a loan and then you need some small amount to cover some unforeseen expenses. Will you take out a loan which is same as the existing loan or will you look for a top up amount that will allow you to cover the additional expenses? The second option sounds better right?

There is a catch however, a Top Up loan is applicable only if you have a home loan. Top Up loans are not available for any other types of loans. Your home loan can be from any one of the following entities:

  • A Bank
  • An HFC or Housing Finance Company
  • An NBFC or Non-Banking Financial Company

Here are a few things you need to know…

  • You must have an existing and active home loan in order to apply for a top up loan.
  • The top up loan that you will be granted will not realign or change your home loan outstanding.
  • The top up loan can be used for just any purpose. It is not necessary that you will have to use it for the purchase / improvement work of a house.

The possible uses of a top up loan can be:

  • Paying off some other debt you already have (for example, credit card debt).
  • For covering marriage expenses.
  • For buying a car.
  • For covering the expenses of a vacation.
  • For covering the expenses of education of your child.
  • Of course, you can use the money for down payment purpose in case you intend to buy a different property.

So basically, you are free to use the top up loan for just about any purpose. There are no obligations like a home loan. In other words, a home loan has to be invariably used for the purchase of a house. Top Up loan has a whole different story to tell.

Which companies offer Top Up loan?

Nice question. The answer is very simple. Any bank, NBFC or HFC which offers home loan will also offer Top Up loans. Here are a few examples:

  • SBI
  • Bajaj Finserv
  • ICICI HFC
  • ICICI Bank
  • Citibank
  • HDFC

Those are just a few examples. There are many more in the list. If you have a home loan with some organization, simple up walk up to them and ask whether they have Top Up loan facility or not. Most of them will give an acknowledgement nod to you.

Now here is something you should not forget…

All companies (Banks, NBFCs and HFCs) are different and hence, they have different terms and conditions too. Despite the fact that they may all offer Top Up loans, the terms and conditions for such loans can vary significantly. They can vary in terms of:

  • The limit that is sanctioned.
  • The interest rate that is charged.
  • The eligibility conditions they have.
  • The tenure of the Top Up loan that they sanction and so on…

So, just because they have a product like that, it does not mean that you should straightaway ask for one. First inquire about the conditions. Compare them with other loan products like the personal loan and then decide.

The usual eligibility conditions for top up loans:

We said that different companies have different conditions. However, when it comes to eligibility criteria, here are some of the common conditions that you will come across:

  • You need to have a home loan with any organization (bank, NBFC or HFC). The loan has to be active.
  • The home loan must have run a tenure of at least 6 months (for some organizations this is 12 months). The reason why this is an important eligible criterion is that banks or other financial organizations will go through your repayment history and check for your credit worthiness. Only if they find that you are worthy enough to be given further credit, they will consider your Top Up loan application.
  • In case you want to take out a Top Up loan from a different organization where you do not have a home loan, you will first have to transfer your home loan to that organization from your existing organization. This is also known as the balance transfer.
  • You need to have a proper repayment history in order to be eligible for a balance transfer from an old bank / non-bank to a new bank / non-bank.
  • You need to have a good credit score as well. Remember that a good credit score is necessary because banks often check for your credit score to understand your credit worthiness.

What are the general features of any Top Up loan?

The reason we are saying general features is that Top Up loans may have different features depending on the bank, non-banking financial company or housing finance company you are approaching. However, there are always a few common features. Those common features or general features are being mentioned here. However, make sure that you inquire about the features of the product directly from the bank or non-bank company that you are approaching for this product.

So, the general features are…

  • Banks or other financial organizations will not allow unlimited Top Up loans. There will always be cap. This cap can come in form of either a maximum fixed amount for Top Up loans or it can be in form of limit to what was originally sanctioned. For example, if you opt for a home loan and the sanctioned limit is say one crore rupees (which is the maximum loan that will be given to you based on your earnings and other eligibility conditions). Instead of 1 crore you take out a home loan of says INR 75 lakhs. You didn’t reach the sanctioned limit. Now suddenly you are in need of say, INR 45 lakhs. The maximum Top Up loan that you can get is INR 25 lakhs from that bank (or any other financial company). Because the sanctioned limit was one crore rupees, of which you already took, 75 lakhs, the remaining amount 25 lakhs can be given to you as Top Up loan. Let us take the example of HDFC. HDFC says that the Top Up loan a person is eligible for is the lesser of either INR 35 lakhs maximum (which is the fixed amount) or maximum up to the sanctioned limit. So, as per HDFC, if your sanctioned limit is say 1 crore and you already have a home loan of say INR 75 lakhs, the Top Up loan you will be eligible for is lesser of 35 lakhs or the balance of the sanctioned limit, which is INR 25 lakhs. So you are eligible for a top up loan of INR 25 lakhs from HDFC as per the example above.
  • Some banks and other financial organizations say that the grand total amount of loan and the top up cannot exceed 70 to 75% the maximum market value of the property. What does that mean? It means that if your property has a market value of say INR 1 crore, the grand total of the home loan and the Top Up loan cannot exceed 70% of that value. So, in that case, say the home loan you took out is INR 45 lakhs. The maximum allowed Top Up loan will be INR 25 lakhs because 45 lakhs + 25 lakhs = 70 lakhs = 70% of the maximum market value of the property. If we are to put this in a tabular format:
Parameters Values
Market Value of the property you want to buy INR 1 crore
Home loan you took (a) INR 45 lakhs
Max allowed loan outstanding (b) INR 70 lakhs
Max allowed Top Up loan (a – b) INR (70 – 45) lakhs = INR 25 lakhs
Please note that loan cap is set at 70% of market value of property.
  • The tenure of a Top Up loan can be 15 to 20 years. Different banks and financial organizations have different tenures. Please remember that the tenure of a Top Up loan can never exceed the tenure of the base home loan. It can however be equal to the tenure of the base home loan.
  • A Top Up loan always needs a collateral. In case of a Top Up loan, the property itself becomes the collateral and the bank or financial organization will maintain a lien on that property. This explains why there is always a cap to the amount of Top Up loan that is allowed. In case of default, the bank or the financial organization should be able to sell your property and recover the entire amount (i.e. the grand total of the base home loan and the Top Up loan).
  • The interest rate you need to pay on the Top Up loan might be fixed or it might be floating. In case of floating interest rates, Banks will follow Base Rate and Non-banks will follow Retail Prime Lending Rate.
  • Top Up loans have several types of fees associated. First thing first, there will be a processing fee. The banks or non-banking organizations will charge a fee for processing the loan. This fee is to be paid up front. Don’t worry. You will not have to pay anything out of your pocket. The fee will be calculated, deducted from the loan amount and the remaining amount will be paid to you.
  • There will also be a foreclosure fee and prepayment fee. These fees show up later when situations arise.
  • When it comes to documentation, the process is fairly simple. The fun part is that this loan is taken out over an existing home loan. During the home loan you already completed the documentation process. So, you are already an existing customer and hence, there will be very little to no documentation. However, if you decide to transfer your home loan to a different bank or financial organization, you will have to do some extra paperwork depending on the rules and regulations of the new bank or organization. However, that paperwork will be mostly limited to the home loan account. Once that is completed and it comes to Top Up loan, the paperwork will be reduced drastically. As said before, there will be little to no paperwork.
  • Don’t think of Top Up loan as a Loan Against Property or LAP. A loan against property is a loan in which you put your property as a collateral provided no bank or non-bank company has a previous lien on it. It is just a fresh property. In case of Top Up loan however, the loan comes against a property which is already a collateral for the active home loan you took previously.

Now we have a fairly good idea of Top Up loan. What about personal loan? Well, most of you already know about personal loans. They are heavily advertised and they are often looked upon as nuisances in financial world. Still people go for it because it is easy to secure a personal loan. Now the question is, which one is better – a Top Up loan or a Personal loan? We will not go in details of personal loan but instead will only take a look at the difference between the two types of loan. That should clearly tell us which one is better.

Differences between Top Up loan and Personal loan:

Differentiator Factor Top Up Loan Personal Loan
Type Secured loan – requires a collateral Unsecured loan – does not require a collateral
Tenure Very long tenures. Can be as long as 20 years or even as long as the home loan tenure Tenure doesn’t cross 5 years’ limit.
Interest rate Very cheap compared to personal loan. Stays within 9% and 12%. Pretty high. Usually ranges between 18% and 25%.
Documentation Very simple. Very less to nil Requires a lot of documentation. Sometimes, documentation problems can lead to loan denial.
Tax benefits If used for new home purchase or home improvement, tax rebates apply. No tax rebates apply. You have to pay usual income tax.

In light of the above table, it can be safely said that Top Up loans are way better than the Personal loans.

However, do keep in mind these following points before you jump into Top Up loan:

  • Sometimes, personal loans can be better option because Top Up loans can take longer time to process and also, it may happen that the amount of Top Up loan you are eligible for is not enough to cover your financial requirements.
  • When you seek to move your home loan to another bank or non-bank company and then take a top up loan, do the math properly. Foreclosure fees, processing fees etc. can all build up quickly and can render a Top Up loan less lucrative.
  • If you think of prepaying a home loan after you take out a Top Up loan, that prepayment will be counted towards the prepayment of your Top Up loan. That’s how it works and hence, you will have to bear prepayment penalties on your Top Up loan and your home loan will not be affected at all.

Bottom line, there are goods and there are bads. You have to evaluate each aspect carefully before you decide on what works best for you. Don’t rush! Take your time. Learn, evaluate and then decide. This will prevent any unnecessary financial loss or burden.

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