Namita Bhadury, 30, was a young and successful marketing professional in Kolkata who had just availed a home loan to buy a house in one of the poshest localities of the city. For the first few months, she managed her EMIs well. But she faced a cash crunch when her father was ill and had to be admitted to the hospital. She needed about Rs.4 lakh immediately to pay for her father’s surgery.

Since she was already paying a home loan, she did not have ready cash with her. She decided to take up another loan. That is when a bank official informed her about a top-up loan. She was advised to talk to her home loan provider for a top-up loan, which could help her out.

Let us understand what Top-up loans are and how they could help you too.

A Top-up Loan is an increment offered on your existing Home Loan and comes with a maximum tenure of 10 years and a rate of interest that’s usually 1-2% higher than your Home Loan rate.

Let’s take a look at a couple of pros and cons of a Top-up Loan to help you understand it better.

Why Opt for a Top-up Loan?

Lower Rate of Interest

Unlike the high rate of interest imposed on a personal loan, a Top-up Loan interest rate is just slightly higher than that of a Home Loan. It comes with a long tenure, which further ensures that you can pay the EMIs easily, and could potentially help you maintain a balance between your monthly budget and loan payouts.

Easy Application Process

You can apply for a Top-up Loan by filling out an online application form. To ease the approval and sanctioning procedure, you can go with your existing lender and minimize the documentation process. Or, you can approach another lender if they offer you a lower rate of interest and better features. Some institutions, such as Bajaj Finserv, allow you to opt for a combination of Home Loan Balance Transfer and Top-up Loan so that you can enjoy the low rate of interest offered.

Discretion of Purpose

You can utilize the money borrowed through a Top-up Loan for any purpose. For instance, if you want to buy a car but are short of funds, you should go with a Top-up Loan instead of a Personal Loan or a car loan. This will help you avoid a high rate of interest and your car will not be seen as a collateral either.

Tax Benefits

A tax deduction is applicable on a Top-Up Loan only when you utilize the amount for buying a home or for home improvement purposes. The interest paid is eligible for tax deduction under Section 24 of Income Tax Act, 1961. On the other hand, you can claim a tax deduction on the principal amount only if it has been utilised for purchasing property.

Pay Off Unsecured Loans

If you’ve taken any unsecured loan, you might want to pay it off as soon as possible to avoid hefty interest charges. A Top-up Loan comes with a much lower rate of interest than any unsecured or Personal Loan and you can avail it to clear any outstanding high interest debts.

Why You Shouldn’t Opt for a Top-up Loan?

Dependent on Repayment Record

If you have a bad repayment record, then chances are you won’t be eligible for a Top-up Loan. You need to pay your EMIs regularly to be eligible for this loan. Also, the Top-up Loan interest rate would depend on your credit score and past repayment record. And, if you don’t have a clean track record, you might not be able to negotiate a lower rate of interest.

Not Applicable for New Home Loan Applicants

If you have just availed a Home Loan, you won’t be eligible for a Top-up Loan. You should have successfully paid off some EMIs and completed a part of your Home Loan tenure before applying for a Top-up Loan. The repayment period, though, varies from lender to lender.

Limited Availability

Not all financial institutions offer this loan and even your current Home Loan provider might not have a Top-up Loan option. In such cases, you can approach financial institutions like Bajaj Finserv that offer Top-up Loans on Home Loans at a reasonable rate of interest.

Now that you know the pros and cons of a Top-up Loan, you should opt for one only if it’ll ease your financial problems and not increase them.

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