An individual has already taken a personal loan and is paying the regular EMIs. They now need more money for an emergency. In such a situation, the individual has two options. They can either go for a top-up loan or a new personal loan.
In this article, we will understand what a top-up loan is, the difference between a top-up loan and a new personal loan, and which one an individual should go for.
What is a top-up loan?
A top-up loan is a credit facility provided by banks and NBFCs that allows existing borrowers to borrow an additional amount on top of their existing loan. The top-up loan facility is made available to borrowers making timely payment of EMIs on the existing loan. The bank/NBFC may make the top-up loan facility available after the timely payment of a specified number of EMIs on the existing loan.
For example, Ajay took a Rs. 50,000 personal loan for a 2-year tenure to get his house painted. After 1 year, he wants to buy a sofa set and needs additional funds of Rs. 30,000. He approaches his existing bank, which offers a top-up loan of Rs. 30,000 for a tenure of 1 year. Ajay avails the top-up loan.
Features and benefits of a top-up loan
The features and benefits of a top-up loan include the following.
Minimal documentation: You are taking a top-up loan from a bank/NBFC with whom you have an existing running personal loan. They have already collected all the KYC and financial documents at the time of processing the personal loan application. Hence, for the top-up loan, the documentation will be minimal.
Faster processing: When processing the personal loan, the bank/NBFC has already done the KYC check, credit score check, home/office verification, etc. Hence, the bank need not do the verification/checks again at the time of processing the top-up loan application. Thus, the top-up loan approval and disbursal are faster than a new personal loan application.
Lower interest rate: You have proved your credibility to the bank/NBFC with timely EMI payments of your existing personal loan. Hence, considering your past timely repayment track record, the bank/NBFC may offer the top-up loan at a lower interest rate.
Personal loan vs top-up loan
We have understood the basics of a top-up loan. Let us now compare a new personal loan with a top-up loan.
| Personal loan | Top-up loan |
|---|---|
| An individual can take a personal loan from any bank or NBFC. | A borrower can take a top-up loan from a bank or NBFC with whom they have an existing personal loan running. |
| A bank can give a personal loan to existing and new customers. | A bank can give a top-up loan to existing customers only. |
| An individual can take a personal loan at any time without any waiting period. | There may be a waiting period (for example, six months of timely EMI payment on the existing personal loan). The bank may analyse the borrower’s repayment track record before making the top-up facility available. |
| For a personal loan, the borrower has to submit documents like the duly filled application form, photograph, KYC documents, income documents, etc. | In the case of a top-up loan, most of the borrower’s information/documents are already available with the bank. Hence, the documentation is minimal. |
| The bank may offer a personal loan at standard interest rates. | Based on the borrower’s timely EMI repayment track record, the bank may offer the top-up loan at a concessional interest rate. |
| A new personal loan involves underwriting a fresh proposal from scratch. Hence, the processing time may be higher than for a top-up loan. | The approval and disbursal time for a top-up loan is shorter than for a new personal loan. |
Important points to note for a top-up loan
A borrower must note that merely having an existing personal loan from a bank will not make them eligible for a top-up loan. Before rolling out a pre-approved top-up loan offer or approving your top-up loan application, the bank will consider various eligibility criteria. It will consider your existing loan repayment track record, age, top-up loan amount requirement, credit score, income, debt-to-income ratio, etc. If you fulfil the bank’s eligibility criteria, the bank will approve your top-up loan application.
A top-up loan may involve a processing fee, which is usually a percentage of the loan amount or a flat amount. Just like a regular personal loan, the borrower can use a top-up loan for any purpose, provided it is legitimate and legally allowed. Some use cases include medical or any other emergency, home renovation, celebrating an occasion (festival, birthday, marriage, anniversary, etc.), enjoying a family holiday, etc.
The repayment tenure of the top-up loan may be the same as the existing personal loan. However, the bank may offer a choice of a longer tenure depending on the remaining tenure of the existing loan and the borrower’s preference. In the case of a new personal loan, it will have its own repayment schedule, independent of the existing personal loan repayment schedule.
Top-up loan vs new personal loan: Which one should you go for?
If your loan amount requirement is small and urgent, you may consider going for a top-up loan. The repayment schedule and tenure may be the same as the personal loan. Managing a top-up loan is easier than managing multiple personal loans.
If your loan amount requirement is higher and you want a longer repayment tenure, you may consider going for a new personal loan. You may take a new personal loan from the same bank where you have an existing personal loan or from some other bank. Compare personal loan offers from different banks based on the processing fee, interest rate, repayment tenure, repayment flexibility, charges/waiver on partial prepayment/foreclosure, and select the one that best suits your requirement.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
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