Is it Good to Take a Top-up Loan?
Last Updated : Aug. 27, 2020, 5:52 p.m.
A top-up loan is an amount that you get over your existing loan amount from your present lender. All you require is to contact the existing lender and apply for a top-up loan. But a top-loan can be availed at other lenders too. You may ask, how can it happen? Well, you can get this loan while switching the running loan from your present lender to another one via a balance transfer process. Even as you have more than one top-up loan option, should you go for it? Maybe you need to evaluate so that you can find the answer to this pertinent question. We are here to help you do so. Let’s begin!
Factors That You Should Consider to Decide Whether a Top-up Loan is Viable for You
As a top-up loan is an additional loan burden and can have a bearing on your overall finances, you should not opt for it just for the sake of it. Do a feasibility check first before deciding to apply for a top-up loan. The following factors will help you make the right call.
Check Whether You Require a Top-up Loan or Not
A top-up loan is given to borrowers so that they can meet various personal needs. See whether it is vital to fill that need. As someone who cares for the penny spent, you should avoid applying for this loan if that is more of a want than a need. Even if you need it, you should not apply instantly. Check your savings too. See how much bank deposits and investment balances you have. We are not telling you to consume all your savings to meet your needs. But some portion of that can be used to reduce the loan amount and the EMI obligation that follows. An optimized top-up loan taken based on your overall financial situation can help meet your needs while also ensuring a hassle-free loan payment experience for you.
Check Your Income and Existing Obligations Before Applying for a Top-up Loan
Your monthly income can be an indicator of how much loan burden you can take. Banks and non-banking finance companies (NBFCs) also check your income before deciding whether to disburse a top-up loan or not. Since it’s about a top-up loan, you are already paying a loan. So, your repayment capacity reduces from when you don’t have any debt obligation to make. The lender will decide the top-up loan amount in a way that its proposed EMI does not constitute more than 50-60% of the net monthly income post the existing loan EMI and any other obligations you may have. If you are in the low to a mid-income category, you need to ensure the proposed EMI constitutes even lesser than what’s acceptable by the lender. Let’s consider an example to understand it better.
Example – Ravi Singhal, a sales manager in a pharmaceutical firm, earns INR 45,000 (Net) a month. He has a 5-year personal loan of INR 5,00,000 at an interest rate of 13% per annum. The EMI payment amounts to INR 11,377, which constitutes around 25% of his net monthly income. His total interest obligations will amount to INR 1,82,592 by the time the loan finishes. Since he comes in the mid-income category, he should decide the top-up loan amount prudently. He requires a loan of INR 2 lakh and he has savings of some INR 1,20,000. What will be the difference if Ravi takes the entire INR 2 lakh loan and when he uses INR 50,000 from his savings and takes a loan of INR 1,50,000? Let’s find out.
| Loan Aspects | Scenario 1 | Scenario 2 |
|---|---|---|
| Current Personal Loan EMI | INR 11,377 | INR 11,377 |
| Personal Loan Taken | INR 2,00,000 | INR 1,50,000 |
| EMI on a Top-up Loan | INR 6,739 | INR 5,054 |
| Interest Outgo on a Top-up Loan | INR 42,596 | INR 31,947 |
Note – The EMI and interest outgo on a top-up loan are computed based on the tenure of 3 years.
You can see in the table the savings Ravi will have while opting for a lesser top-up loan amount of INR 1,50,000. Both EMI and interest payments will come down by INR 1,685 and INR 10,649, respectively.
Check the Interest Rate on the Top-up Loan Amount
You will look for a top-up loan first at your existing lender, and that’s quite understandable. Check with the lender about the interest rate it is going to offer you on the same. You can check the effect of the interest rate on a personal loan EMI calculator and see whether that is feasible to you. Now, you can get the top-up loan on a running personal loan, home loan, etc. The interest rate on a top-up home loan can be lower than that of a personal loan. But if you have a personal loan running in your name and want a top-up on it, you can request the lender to do so. Now, the existing personal loan EMI and top-up loan EMI can be either merged or go separately. In the merged EMI situation, the top-up personal loan will run for the tenure that’s left for the existing personal loan to complete. In a separate EMI situation, the tenure for the top-up personal loan can be a maximum of 5 years.
What are the Top-up Personal Loan Interest Rates That Exist Now?
If you have a personal loan running in any of the following lending institutions, you can check the interest rate you could expect on your top-up loan amount in the table below.
| Lenders | Interest Rates (In Per Annum) |
|---|---|
| State Bank of India (SBI) | 11% |
| HDFC Bank | Anywhere from 10.75% - 14.50% |
| ICICI Bank | Starts from 11.25% |
| IndusInd Bank | Anywhere from 10.25% - 26.00% |
| Kotak Mahindra Bank | Starts from 10.99% |
| YES BANK | Anywhere from 11.05% - 20.25% |
| IDFC First Bank | Anywhere from 10.50% - 25% |
What If the Top-up Loan Interest Rate Offered is More?
In that case, you need to do a balance transfer deal with another lender, and on the transferred balance, you can get a top-up amount. Make sure you fetch a lower interest rate deal with the new lender. If you manage to do so, your overall cost will reduce. But the new lender will seek a credit score of more than 700 before approving the deal. It will also want a smooth repayment track.