Top-up Loan vs Fresh Loan

Suresh. M is a 40-year-old IT professional living in Bengaluru, he is having a home loan of 60 lakhs from HDFC bank for a tenure period of 25 years. Till now Suresh has served 48 EMIs without any default. Now Suresh is willing to renovate his house which will cost him approximately 4 lakhs as per his calculation. Now Suresh is not in a position to afford that much amount from his pocket and thus he decides to have a personal loan of 3 lakhs from HDFC only as he has a good relationship with the bank now. 

When Suresh calls HDFC for a new personal loan, they suggest him to go for a Top-up-home loan instead of going for a new home loan. 

A top-up loan is a facility provided by the bank to its existing loan account holders. This facility helps borrowers to get additional funding over and above their existing loans. However, a top-up loan facility is available only for a home loan or personal loan

The benefits include – 

  • Immediate funding 
  • No need to go through all the processes 
  • Low- interest.
  • Reliable backup as you already have an existing relation with the lender

Let’s understand this more clearly with the calculation by comparing both the options.

The interest rate for existing home loan – 8.5 %

The interest rate for a new personal loan will be – 10.35%

EMI for home loan – 56,366 monthly

EMI for the new personal loan – 10,210

If they take a top-up loan rather than a new personal loan he will get it approved at 7.5% as the home loan rates have reduced now. 

So, it’s for sure that Suresh will be able to save more if he avails a top-up home loan. 

The same is true with personal loan top-ups. If you are already servicing a personal loan and feel the need to borrow again. Then, in that case, you have two options –

a. getting a top-up personal loan or 

b. availing a fresh personal loan.

A top-up personal loan is also the same as that of a top-up home loan and is provided by a lender to its existing customers. What makes the difference between top-up and the fresh loan is- a fresh personal loan can be given by both existing and new lenders whereas a top-up loan can be given by an existing lender.

As an existing customer is already paying the EMI, one should choose the option by keeping the payment obligations in mind and after comparing and calculating for both the options. 

However, while taking the decision it’s important to consider your present situation while also thinking about the future. How the EMIs will affect you, the total cost of new borrowing, processing fees etc.

Features of a top-up loan

  • Simplified documentation process
  • Easy and faster approval
  • low rate of interest
  • Lower EMIs
  • Hassle-free process. 
  • Availability of longer tenures

Important note – Same as any other loan, a top-up loan also has processing fee charges, cheque-bounce fee and other fees apply. So, it’s very important to come to any conclusion once you have done the proper calculation and research. A Top-Up Loan also comes with tax benefits under section 80C and Section 24 of the Income Tax Act, but to avail this it’s important to utilize borrowed money for home reconstruction/renovation or for education purposes. You may need to provide proof in order to avail of these tax benefits.

Should you get a Top-up Loan or a Fresh Loan?
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Should you get a Top-up Loan or a Fresh Loan?
Should you get a Top-up Loan or a Fresh Loan? is the question many are asking today, In this Finance Buddha blog we have explained the difference between Top-up Loan & Fresh Loan.
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Finance Buddha
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