Top-up home loan vs personal loan Which is better for you

With the increasing expenses and the increasing options in the market to finance them, individuals nowadays have started worrying less about spending more. The issues of the income-expenditure gap have lessened with the availability of bridges such as loans, credit cards, etc. 

The trend of purchases being made through loans, equated monthly installments (EMIs), credit cards, etc., is on the rise. Financial institutions are trying to encourage it by lessening the hassles, reducing paperwork, reducing the disbursement period, providing flexible repayment options, longer repayment tenure, and attracting interest rates. 

What are personal loans?

A personal loan refers to the money borrowed by an individual to fund their expenditures. It is a lump sum amount that is repaid over a fixed tenure. This kind of loan can be availed for a lot of different purposes. It is generally an unsecured loan, as no collateral is needed to avail a personal loan.

What are top-up home loans?

A home loan refers to the money borrowed from a financial institution to either purchase, renovate, or extend a residential property. A top-up home loan is the amount of money borrowed over and above the existing home loan. Home loans are secured loans wherein the borrower has to provide collateral to avail of such loans. 

Personal loans or top-up loans, which is better?

Usually, when an individual buys a long-term asset, such as a residential property, they might not account for all the costs involved, and more often than not, the expenses exceed the loan amount. The borrower can either go for a personal loan or top-up their existing home loan in such a situation. 

Here are listed some comparisons between the two.

  • Being unsecured, personal loans interest rates are usually higher than a secured top-up home loan interest rate.
  • Anyone can avail of personal loans at any time, but top-up home loans are provided to existing home loan borrowers only.
  • Personal loans are disbursed faster compared to a top-up loan.
  • Though top-up loans do not require additional paperwork, they are harder to get. In contrast, personal loans, though they require paperwork to be done, are easier to get sanctioned.
  • Top-up loans are sanctioned subject to stricter eligibility checks than other loans. In contrast, personal loans do not require pre-approval checks.
  • Top-up loans can be taken for a tenure of up to 30 years or the remaining tenure of the original home loan, whereas personal loans can be availed for a maximum of 5 years.
  • More extended repayment periods of top-up home loans imply that the EMIs are lesser than personal loans with shorter repayment periods.
  • Most financial institutions do not need documents to verify the purpose of the top-up home loan specified, whereas the purpose of personal loans does not need to be specified at all.
  • Top-up home loans, when used for pre-defined purposes like expansion or renovations, the borrower can avail of tax benefits. In contrast, personal loans do not have any provision for tax benefits.
  • Personal loans, when closed early, mandate a pre-closure charge. On the other hand, top-up home loans are free of these charges.

Personal loan or top-up home loan- which one to choose?

Both the loans come with their own set of pros and cons. Choosing one over the other is wholly based on the preference and requirements of the borrower. Suppose the borrower does not want to provide collateral, wants an instant loan, does not have an issue with the interest rates, and prefers the loan to be of a shorter period. 

In that case, they can opt for personal loan, but if the borrower has a good background and rapport with the bank, can meet the eligibility checks of a top-up loan, wants a lesser EMI amount and lesser interest rates, a longer repayment tenure for the loan, and does not need the loan sanctioned immediately, they can opt for top-up home loans.