Taking a loan is an important financial decision that requires careful consideration of factors like interest rates, repayment capacity, eligibility criteria and more. Two popular borrowing options in India are top-up loans that allow you to borrow over and above your existing loan, and personal loans that offer funds for various personal needs. But how do you decide which one works better for you? This article explores the key features, eligibility, interest rates and other details of a top-up loan vs a personal loan to help you make an informed choice.
What is a Top-up Loan?
A top-up loan, also known as a loan top-up or loan enhancement, allows you to borrow an additional amount over your current home, business, car or other loan. It is an option to raise funds without having to apply afresh for another loan. Some key features include:
- You can get a top-up on an existing home loan, car loan, or other asset-backed loan, such as a loan against property.
- The amount of a top-up loan depends on factors such as existing loan tenure, the value of an asset, eligibility, and credit score.
- Interest rate is generally 0.5% - 1% higher than your current borrowing, but still competitive.
- Flexible repayment options like increasing monthly payments or tenure.
- Quick approval within 5-7 working days, as you already have a relationship with the lender.
- End-use restrictions, like funds, have to be used for purposes related to the underlying asset.
Top-Up Loan Eligibility
To avail a loan top-up for your home or car loan, you need to meet the following broad eligibility criteria:
- Have a good repayment track record on your existing loan without delays or defaults.
- Sufficient remaining tenure on current loan, for instance, over 2-3 years.
- Maintaining a healthy credit score of over 750 is preferable.
- Stable income and adequate repayment capacity.
- Own an asset like a home, property, business equipment, or car that has a loan running on it.
What is a Personal Loan?
A personal loan is a secured/unsecured borrowing option to source funds for a variety of personal needs without mandatorily placing an asset as collateral. Some features include:
- It can be used for purposes like medical emergencies, weddings, home renovation, holidays, or other expenses.
- Personal loans are usually unsecured, meaning you do not need to provide collateral. However, some lenders might offer secured personal loans, which require an asset as security.
- Flexible tenure from 12 months to 60 months is generally available.
- Loan amount up to ₹25 lakhs based on eligibility.
- Usually processed and disbursed faster than other loan types.
- May need a guarantor or co-applicant if your credit score is low.
Personal Loans - Interest Rates
Interest rates on personal loans typically range from 10% per annum to 24% per annum. Some key factors that impact rates are:
- Your credit score - the higher your score, the lower the rate.
- Your income level also affects personal loan interest rates - higher earning applicants get better deals.
- Tenure - longer repayment tenures, like 5 or 6 years, mean higher interest cost.
- Some lenders consider the employer profile. Working with reputed companies may get you better rates.
Which is Better For You? Top-Up Loan vs Personal Loan Comparison
Now that you know the basics of both these lending options, let’s perform a personal loan vs top-up loan comparison across key parameters to determine which one might suit your needs better:
Interest Rates
While top-up loans charge slightly higher interest than your existing borrowing, they still offer competitive rates compared to most personal loans. Those with access to funds only at higher interest rates may benefit more from a top-up loan.
End-use of Funds
Top-up loans require you to use the borrowed capital for purposes related to the underlying home, car or other asset. With a personal loan, you usually have complete flexibility to use funds as per your needs.
Eligibility Criteria
Top-up loans have relatively easier eligibility with factors like credit score; income stability and repayment track record prioritised. Personal loans have wider acceptance across applicant profiles but may need a co-applicant if your credit score is below 750.
Approval and Disbursal Timeline
You can expect quicker processing and disbursal with a top-up loan as you have an existing relationship and credit history with the lender. Personal loan approvals take a longer route with more extensive eligibility checks.
Conclusion
You may consider top-up loans if you need funds at competitive interest rates for an asset-linked need and are comfortable placing your home or car as collateral. Shriram Finance offers both top-up and personal loan products, making it much easier for borrowers to compare features and select an option that best fits their financial needs. Personal loans suit those looking for funds for unrestricted personal expenses and do not wish to place any security. Assess both the options above based on your financial situation and specific requirements.
FAQs
Which loan offers a lower interest rate: a top-up loan or a personal loan?
Top-up loans generally have slightly higher interest rates compared to your current loan, but lower than personal loans. Personal loans have interest rates in the range of 10% to 24% based on individual credit score, income, tenure, etc.
Which is better for debt consolidation: a top-up loan or a personal loan?
Personal loans are more suitable for debt consolidation than top-up loans. A top-up loan will have asset-linked end-use restrictions, while personal loans offer flexibility to pay off different loans with the funds.
Can I get a personal loan if I already have a top-up loan?
Yes, you can avail of a personal loan over and above an existing top-up loan, subject to eligibility criteria like credit score, debt-to-income levels, and repayment capacity assessment by the lender.
What is the repayment period difference between a personal loan and a top-up loan?
The maximum tenure offered on personal loans is usually 5-6 years. Top-up loans can match the remaining repayment period of the original home, car or other loan, which may have a longer tenure.
Do both top-up and personal loans require income proof?
Yes, both top-up and personal loan applications require you to provide essential income documents like salary slips, bank statements, ITRS, etc., to establish repayment capacity.
What if I don’t have an existing home or property loan – can I still get a top-up loan?
No, having a current home loan, car loan, or other asset-backed loan is a basic prerequisite to avail a top-up loan from your lender. Those without existing loans can explore personal loan options.
Which loan is easier to get approved for – a top-up loan or a personal loan?
Approval chances are higher and faster for top-up loans as the lender already has your credit history and relationship. Personal loans involve more extensive eligibility checks and take longer to approve.