Personal Loan or Home Loan Top Up: Which One is Better for You?

Updated on: 18 Jan 2024 // 3 min read // Personal Loans
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When it comes to getting access to some additional funds to meet financial obligations, one can easily rely on Personal Loans. While most people are aware of this fact, only a few know that they can also take a Home Loan Top Up for the same purpose. Of course, a Personal Loan can be availed by anyone with a good credit history and stable source of income, while a top up loan can only be taken by someone who is already servicing a Home Loan.

That being said, both personal loans as well as top-up loans, put no restriction on the borrower with respect to the end use of the money, making them both ideal choices for anyone who needs to:

  • Fund their child’s higher education
  • Meet the expenses of a wedding
  • Pay for medical exigent expenditures
  • Renovate their home or office
  • Expand their business
  • Purchase assets for the business
  • Fund operating costs of the business
  • Travel

And these are just some of the financial needs that can be fulfilled using the loans mentioned above.

Now, the question is, which of these two loans prove to be better for you? To find the answer let us compare personal loans and home loan top ups on the basis of some crucial aspects:

Loan Disbursal

Personal Loans have earned unprecedented popularity in recent years owing to their quick approval and disbursal, sometimes in as little as a couple of days’ time. However, the fact remains that you need to file a new application and furnish proofs of your identity, address, and employment before the loan application can be reviewed.

In case of home loan top ups, your existing lender already has all the details and therefore, a significant chunk of your valuable time is saved. All you need to do is apply for home loan top up, and if your repayment history has been good enough, the loan will be disbursed in a matter of few hours or 2-3 days at the maximum. Hence, a top up investment can prove to be handier, when it comes to emergencies such as hospitalisation, accidents, or unplanned travel requiring a hefty amount.

Interest Rate

A Personal Loan is primarily an unsecured credit type and therefore accrues a considerably high interest rate, ranging anywhere from 11% to 22% depending on your credit history. In some cases, the rates have even gone up as high as 26%, making these loans exceptionally expensive.

On the other hand, home loan top ups only accrue an interest rate of 9% to 12% making them much more cost effective.

Repayment Terms

A Personal Loan ought to be repaid in a maximum of five years. Hence, if the loan amount is hefty, then considering the high interest rate, the equated monthly instalment (EMI) outgo can often be exceptionally high. This can put a strain on your finances, and can even affect the quality of your life, especially when you are required to take the loan in emergencies, and are not prepared to deal with the consequences.

In case of top-up loans, however, you have a longer tenure – as long as the tenure for your outstanding Home Loan – and can, therefore, repay the amount in smaller chunks, without putting any significant strain on your finances. Besides, the low-interest rates will work in your favour and help you save money.

Pre-Payment Penalty

In a vast majority of cases, Personal Loans attract a substantial prepayment penalty, which is usually in the range of 1.5 to 4% of the outstanding balance. This high charge can prove to be discouraging when you wish to pay off the loan in part or full.

Top up loans, on the other hand, attract no such penalty, thus giving you complete freedom to pay off the mortgage on your accord, without any worries, whatsoever.

Tax Benefits

With the exception of the loan amount being used for the renovation of your house, or for funding your business needs, Personal Loans are not entitled to any tax benefits. Contrary to this, top-up loans enjoy the same benefits as the home loans that they are availed on, and hence prove to be more cost-effective in most cases.

We hope that you will now be able to take a more informed decision when it comes to choosing between a Personal Loan and home loan top up in order to meet your financial needs. As far as the benefits are concerned, it is advisable to prefer a top-up loan against a personal loan.