Top-up vs personal loan: Which is a better option for you?

Updated : September 12, 2020 03:08 PM IST

While these loans are easily available, borrowers should select the appropriate loans as per the needs.

In order to overcome any kind of financial crunch, people can apply for a top-up loan on the existing home/auto/personal loan or can take a new personal loan. While these loans are easily available, borrowers should select the appropriate loans as per the needs.

According to Anuj Kacker, co-founder, MoneyTap, for someone who has a good repayment track record, availing a top-up loan may work out as an efficient solution. It would get the benefits of a secured loan - i.e, lower interest rates and lower EMIs, without having to mortgage a new asset.

Also read: Here are key things to consider before taking a personal loan

Kacker explains this with an example.

"Say, a borrower has an existing home loan payment for the past six years and is looking at a one-time remodelling or renovation - getting a top-up loan from the existing loan provider will get him/her a better deal. Under these circumstances, the interest rates will be lower on a top-up loan than a personal loan," he suggests.

With top-up loans, as Sumeet Srivastava, founder and chief executive officer, Spocto Solutions says, borrowers can also opt for extended tenure.

The additional advantage that comes with top-up loan is that it typically does not require borrowers to provide fresh documentation as it is already with their existing lender.

However, there are some concerns with top-up loans too.

Also read: Contemplating closing a credit card? Here are key things to remember

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, according to Anil Pinapala, CEO and founder, Vivifi.

"This would also mean if one is trying to sell their car or bike, they would have to first clear the top-up loan as well, which would not be the case if the customer had accessed a new loan," he explains.

Personal loans can also be useful for a larger range of purposes, including paying for annual school fees, a down payment for a two-wheeler, managing a home renovation project or for covering unexpected medical expenses.

The constraints on getting a personal loan, as Kacker elaborates, are much lesser if borrowers have a good credit history or demonstrate a track record of timely repayments.

With both the loans having its own sets of pros and cons, the selection between the two totally depends on what the need of the consumer is - if the need is short-term or long-term and also depends on how quickly he/she need the funds.

Disclaimer: CNBCTV18.com advises users to check with certified experts before taking any investment decisions

Top-up vs personal loan: Which is a better option for you?

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