The expenditures never end. Suppose, there is a situation where you have already borrowed a home loan, and now you are in urgent need of an extra loan, in such a case, there are two options that will come to your mind – apply for a fresh loan to fulfill your needs or opt for a top-up loan which is a much faster option if you already have a home loan on your name.
Top up loans can be obtained quickly as you already have a home loan. Thus, there is no complexities in top up loan. If you have fulfilled the home loan eligibility criteria, then you can opt for a top up loan, which can be availed pretty quickly. Majority of the lenders require you to successfully repay 6-12 months of Equated Monthly Installments (EMIs) in order to grant you top-up loan options, however, certain Non-Banking Financial Companies are more flexible.
For instance, if Mr. A has an income of INR 10 lakhs per annum, assuming that his loan eligibility is INR 60 lakhs, he can choose to select loan of up to INR 60 lakhs. Now, let us assume that he decides to borrow INR 45 lakhs for a period of 20 years. So, over the period of 3 years, he has duly repaid the EMIs and even his income has increased to INR 12 lakhs. Let us assume that he has successfully paid INR 7 lakhs, this will bring his outstanding loan amount to INR 38 lakhs. This will make him eligible for a new loan. Thus, his loan limit will increase from INR 60 lakhs to INR 66 lakhs.
With such a decent financial standing, now Mr. A can opt for a top-up loan. The financial institution will deduct the outstanding INR 38 lakhs from his new loan eligibility of INR 66 lakhs and will allow him to avail a top-up loan of up to 28 lakhs. Furthermore, the documentation process will be much quicker than the initial loan effort.
Thus, one can understand how successful repayment of EMIs helps in increasing the home loan eligibility amount, thereby, enabling you to get a top up loan on that limit. Now, having understood how a top up loan works, let us understand the benefits of top up loans:
Multipurpose: You can use top up loan for variety of purposes like
- Renovation of home
- Top-up loan to be used as a personal loan
- Purchase another property
- Purchase a plot or land
- Expenses for children’s education or marriage
- Business funding
- Medical expenditure
Tax benefits: Tax benefits can be availed through a top up loan if you use the amount to buy a house or if you are using the amount for renovation purpose. However, you must remember that tax benefits can be availed only if you are buying a house on principal and interest.
No collateral security: One of the biggest benefit of a top up loan is that you don’t have to mortgage some asset. However, one thing to keep in mind is that you have to close your top up loan. Mostly, borrowers close their home loan and forget to close the top up loan.
One should pay attention on all the aforementioned points. It is important to know that a top-up is a direct competitor of a personal loan and when you have a home loan in your name, a top up loan is a much better option than a personal loan due to the easy processing.