Rimi Choudhury, 36, took a home loan to buy a house. With smart planning, she managed the added expense of the EMIs quite well. However, a problem arose when placing her three-year-old son in a top private school. She needed to pay a massive one-time admission fee. The amount payable was just over a lakh of rupees.

Rimi, a single mother, did not have ready cash to meet this cost. Besides, given her home loan liability, she could not get a personal loan on reasonable terms. Either the loan amounts were too low or the interest rates too high. That is when a bank official informed her about the top-up loan. He advised Rimi to check up on her home loan top-up eligibility and the documents required.

What is a top-up loan?

Are you currently repaying a home loan? If so, you can avail a top-up loan from your home loan provider. Simply approach the bank or non-banking financial company (NBFC) where you have a home loan account.

A top-up loan works differently from a home loan. Say, you have a home loan with a tenure of 15 years. You have already paid off five years’ worth of instalments. The balance repayment period now stands at 10 years. If you avail a top-up loan at this stage, your maximum tenure for this loan will be 10 years. But this maximum tenure may vary from one lender to another.

The loan amount and other terms may also differ. For example, banks may offer one set of terms, while an NBFC like Bajaj Finserv may offer a different set of terms. How much should you expect from a top-up loan? Typically, the balance on your home loan combined with the amount of top-up should not exceed 60% of your property’s value.

Excellent for emergencies

If you already have a home loan, getting a top-up loan is easy. Just visit your lender. Inquire about your home loan top-up eligibility and the documents required.

Many borrowers use a top-up loan for property-related expenses. You can use it to fund renovations and repairs in your home. In such cases, tax benefits apply on your loan repayment.

But a top-up loan need not be restricted to home-related costs. It is also a convenient option for meeting urgent expenses. For example, Rimi could use the top-up loan to pay the school admission fee for her son. A top-up loan can also come in handy if you need urgent medical treatment that your insurance will not cover. Or, you might use it to book flight tickets at the last minute. Whether you need funds for a wedding, a business requirement, or some other urgent need, a top-up loan can be a handy tool.

Besides, you get the funds you need with no questions asked. It does not matter who the lender is—whether it’s a bank, or an NBFC like Bajaj Finserv. You are free to use the money as you deem fit.

Top-up vs personal loans

As you can see, a top-up loan works a lot like a personal loan. But it also has some advantages over the personal loan if you need funds right away.
Fast processing: As you are paying off a home loan, your existing lender has all your details. So, you do not need to go through a fresh application process. Loan sanction is quicker as a result. When applying for a personal loan, however, you may have to complete the formalities all over again. This could delay when you receive the funds.

Credit score matters less: A poor credit score will hurt your chances of getting a personal loan at reasonable rates. But it will not matter when applying for a top-up loan. The lender will only look at your repayment record vis-à-vis the home loan. Do you pay your EMIs regularly? If so, getting the top-up will be easy.

Lower interest rates: Interest rates for personal loans are often high. They range from 15% to 25% depending on your credit score and repayment record. Top-up loans are more affordable. They charge between 11.25% and 13% as interest.

Longer tenure: You need to pay off a personal loan within five years. But a top-up loan can last up to 15 to 20 years. This allows you to spread out the debt burden over a longer period. That means the strain on your finances is less.

The bottom line

As you can see, top-up loans are a convenient option if you need money in a jiffy. They are quick, easy to get, and affordable. So, look beyond the personal loan if you have a home loan already. The top-up loan could be your top loan option for emergencies.