Emergencies can come in any shape and form and at any time in life, there could be chances that an individual has exhausted all the savings and emergency fund. In such cases people contact banks and other financial institutions to borrow the money. There are several types of loans provided in India, such as a home loan for the home construction or to buy a house, two-wheeler loan to buy a two-wheeler, car loan to buy a car and personal loan to meet the untimely need of money.
What is a personal loan?
Personal loans are the unsecured loans, meaning against such type of a loan a borrower does not have to pledge any asset as collateral. The personal loans can be used for a medical emergency, plan a trip to a foreign country, organising a wedding of a dear one or meet daily expenditure. Generally, banks offer personal loan at a higher rate of interest and the loan amount typically ranges from Rs 1 lakh to Rs 25 lakh.
What is a top-up loan?
Most of the banks offer the facility to avail a top-up loan on an existing loan. The top loan is offered by a bank or financial institution if an individual has an existing loan and he needs some more funds to meet the requirement. However, a top loan is provided to the one who has a good credit history, who makes all the payments on time. The benefit of a top-up loan is that a borrower does not need to submit additional documents.
Personal loan versus a top loan, which one is better for you?
- Interest rates: A borrower can enjoy a lower interest rate on the top-up loans, as a house is kept as security in such type of loans and banks also have the documents already submitted which makes it a secured loan. Whereas personal loan is offered on a higher interest because of its unsecured nature.
- Tax benefits: Some lenders do not provide tax benefits on a personal loan if the loan is taken for home renovation and all but there are few banks who offer tax benefits on a top-up loan if the loan is used for expansion of house or renovation. Before selecting a type of a loan and a lender to read carefully about the tax benefits.
- Tenure: Generally, top-up loans are offered for a longer tenure when compared to a personal loan. Top up loan can be repaid in 15 years whereas personal loan has to be repaid in 1 year to 5 years. So if you want shorter EMI then you should go for a top-up loan, but if you can repay the loan within a time frame then you should go for a personal loan.
- Processing time: Usually, the time taken for loan amount disbursal is more in the personal loan, as the lender check the eligibility criteria, check the documents required for the loan and various other things as the loan is applied for the first time. Whereas, in the top-up loan, the processing time is only for a few hours as no documents are required and the banks do not have to verify the details again and again. Some of the lenders also allow borrowers to apply for a top loan online.
- Simple documentation: Minimal or no documentation is required for a top-up loan as discussed a top-up loan is given to a person who has already availed the loan. While applying for personal loan a borrower will have to submit documents like address proof, identity proof, salary slips, bank statements and few others. Less documentation drastically reduces the loan disbursal time.
Bottom line: After going through this article one might think that top-up loan is a great alternative but one needs to understand that top loan can only be availed by a person who has already availed a loan and has paid EMIs for that loan for 6-12 months. Before deciding on which loan to avail, a borrower should always compare the options available with the banks and compare them thoroughly.