As acquiring a extended-term asset requires heavy investment, it might not be feasible for most folks to spend the complete quantity out of his/her pocket. So, to obtain a home folks typically rely on home loans. Apart from reduced interest prices compared to unsecured loans like private loans, a home loan also supplies tax advantages, which also encourages purchasers to take loan.
Similarly, auto loans or other such loans taken to obtain extended-term assets also come less expensive than unsecured loans.
In case the loan taken to obtain a extended-term asset falls quick, the borrower might need to have to borrow extra cash to bridge the gap. Such a borrower would have two possibilities – either to take a major-up loan against the current loan, or take a private loan.
The interest on a major up loan is typically comparable to the interest against the original extended-term loan and does not need to have extra paperwork, but is really hard to get sanctioned. On the other hand taking a private loan might be pricey, but a lot easier to take.
Advantage
“A personal loan is an unsecured loan that can be availed by any individual, whereas a top-up loan is a kind of secured loan which can be availed only by an existing home loan borrower,” stated Pranjal Kamra, CEO of Finology.
“Due to the relatively lower interest rate structure and flexible loan tenure, top-up loans are a better alternative to a personal loan. A top-up loan can be taken for a maximum tenure of upto 30 years or the remaining period of your existing home loan, while a personal loan is offered for a maximum of five years. Additionally, if you are taking a loan for home renovation or home extension purposes, a top-up loan would offer various kinds of tax incentives which are not available in the case of personal loan,” he added.
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“However, not every home loan borrower is offered a top-up loan facility. Only individuals with good payment history and good credit score can get the loan sanctioned for top-up loan,” Kamra additional stated.
Comparing the two loans, Abhishek Soni, CEO & Founder of Upwards stated, “It’s important to understand the difference between a top-up loan and a personal loan before availing either one. A top-up loan, as the name recommends, it is like a booster loan given to an existing borrower. A top-up loan is generally preferred over the personal loan as the interest rate is often relatively lower as compared to personal loans. Moreover, considering that the lender would already have your KYC details/documents, the processing of the loan will be faster and easier. Besides this, even the tenure for a top-up loan is longer, which can result in a lower Equated Monthly Installment (EMI), making it a better option among the two.”
Talking on the positive aspects of major-up loans, Anil Pinapala, Founder & CEO of Vivifi India Finance Private Limited stated, “Under the current circumstances, when there is less credit available in the market a top-up loan has its advantages. As the consumer typically does not need to provide fresh documentation for the top-up loan and as it is with their existing lender, they might be able to attract a better interest rate.”
Disadvantage
Pointing out the drawback of a major-up loan, Pinapala stated, “However, if the top-up loan is on an existing secured loan like an auto or home then it increases principal owed and thereby reduces the equity. This would also mean if one is trying to sell a vehicle, purchased by taking auto loan, the borrower would have to first clear the top-up loan as well, which would not be the case if the customer had accessed a new personal loan.”
Critically analysing the two kinds of loan possibilities, he suggests, “So, the answer to this question depends on what the need of the consumer is, if the need is short-term or long-term and also depends on how quickly they need their funds. However, in all cases I would advise any potential borrower to always shop and get quotes from various lenders and make an informed decision if a personal loan from a new lender is better or a top-up loan from an existing lender.”