What is Top-Up Loan? Which Banks in India Offer It?

Just imagine, you had recharged your prepaid mobile connection with a balance of Rs. 300 for the month, but your balance is about to get over and it is still 10 days for the month to end. So, you decide to get a top-up recharge of Rs. 150 and continue using the mobile service. Similarly, our lives can keep throwing various financial challenges in front of us, wherein we may need some funds urgently due to medical emergencies etc. There may also be times when your child is insisting on a family vacation and your budget is not allowing that to happen any time soon. A top-up loan can take care of such situations and help you manage and cherish the times without financial stress.

A top-up loan is offered by leading banks and financial institutions as a refill to your existing loans, mostly home loans and personal loans, wherein you can use the recharge of loan amount for any purpose. Most banks are flexible in terms of the purpose of the top-up loan. While you may also think that since the loan has been given on the basis of an existing home loan, it may only be used for the renovation of a house property, but this is simply not the case and the funds can be used for any purpose including child’s education, marriage etc.

Top-up loan can also be availed over existing personal loans, which can help you in getting funds at a faster pace. This happens because the documentation is already complete for you as a borrower with the banks, and hence, the disbursements can happen at much faster pace. Since personal loans are generally unsecured, banks tend to be cautious in sanctioning a personal loan. However, in case a top-up loan is opted for, the disbursal of funds can happen much quicker.

Are you eligible for a top-up loan?

While every bank have their own terms and conditions for grant of such loans, the eligibility criteria generally tend to be almost the same. We discuss the common eligibility terms below:

1. Existing Borrower – The top-up loan is just an add-on to the existing home loan or personal loan and hence, one needs to be an existing borrower to be eligible for the top-up loan.
2. Clean Repayment Record – Considering the flexibility in terms of the loan purpose, banks need to be sure that the credit risk is minimised to the maximum extent possible. As such, it is imperative for you to have a clean repayment record with the bank.
3. Security – The security as prevailing for the original loan generally prevails over the top up loan as well. So, if you are taking a top-up loan over a home loan, the house property on which the home loan has been availed will also be a security for the top-up loan. In case of a personal loan, the top-up loan will also be generally an unsecured loan.

Benefits of a top-up loan

When compared with a personal loan, a top-up loan is helpful for the benefits enlisted below:

1. A Source of Emergency Funding – A top-up loan comes handy especially in case of an emergency funding requirement, as the bank already has the necessary documentation for the borrower ready and no additional security is required for a top-up loan. The appraisal is typically intended to update the financial details and as such, the disbursement of a top-up loan can also happen quickly.
2. Lower Interest Rates – While such a top-up loan provides flexibility of utilisation of funds just like a personal loan, top-up loans tend to be relatively cheaper carrying lower interest rates than a regular personal loan.
3. Impact of Unintentional Lapses in Credit History – There might be a situation wherein credit history has been impacted by an unintentional lapse e.g. an overdue amount appearing wrongly or in an account already settled some time back. While such errors can be got rectified through a standard procedure, the process may take some time. To know more about getting your credit score corrected due to mistakes, read the article here. The borrower may face difficulties for such information in case of processing of a fresh personal loan sanction but is not likely to impact the loan appraisal and sanction process for a top-up loan since the bank already has their own repayment records with the borrower.
4. Probable Tax Benefits – Just in case you have used the top-up loan for eligible purposes like purchase or renovation of a house property or used it for education for a full-time education course, you may also be eligible for tax benefits on such loans.

What should be the repayment term for the Top-up Loan?

The top-up loan generally steps into the shoes of the existing loan and hence, the loan amount is generally repaid over the original loan tenure. EMI burden for the new loan may not be higher, as against a fresh personal loan for a short tenure. However, the repayment of the top-up loan can be so structured to match the repayment term of a short-term personal loan, wherein the EMI might be higher but the overall interest burden will be lower than a regular personal loan. Let us discuss both the options with an illustrative example:

10 years earlier, Aditya had taken a home loan for Rs. 75 lakhs to purchase a flat with an interest rate of 8% and loan tenure of 30 years. His EMI was set out to be Rs. 55,032 per month. Till now, he would have repaid Rs. 9.21 lakhs in principal. Aditya is now considering taking a loan to fund his son’s education in a top B-school. While considering the present income and property value, Aditya might be eligible for a higher loan amount, but to keep the things simple, let us assume the loan eligibility to be the same as earlier. Hence, Aditya will be eligible to take a top-up loan of Rs. 9.21 lakhs, but to decide the tenure, he can consider two options.

Option 1 – Considering the tenure of the top-up loan to be 20 years, the balance tenure of the existing loan

Considering that the interest rate of a top-up loan is in the range of 0.75%-1% higher than the existing loan, this loan would be available to Aditya at 9% p.a., whereas a personal loan is available to Aditya at 12% p.a.

So, under this option, while the monthly payout for Aditya is just around 40% of the amount to be paid under the personal loan, the total amount paid over the loan term is around Rs. 7.60 lakhs higher.

Option 2 – Considering the tenure of the top-up loan to be 5 years, same as that of a fresh personal loan

Considering that the interest rate of a top-up loan is in the range of 0.75%-1% higher than the existing loan, this loan would be available to Aditya at 9% p.a., whereas a personal loan is available to Aditya at 12% p.a.

So, under this option, while the monthly payout for Aditya is higher due to shorter tenure, the EMI is still lower by Rs. 1,369 per month due to lower interest rate, when compared to EMI under a personal loan with the same tenure.

As such, Aditya has to make a choice between lower monthly payouts with higher overall payout and higher EMIs with relatively lower interest amount to be paid in aggregate.

Which banks offer a top-up loan?

All the leading public and private sector banks, as well as financial institutions, provide the facility of loan top-up. Most of the features of a this loan offered by various banks are similar and have already been discussed above. However, for a quick reference with respect to the interest rates, here is an illustrative list of the major banks/Financial Institutions providing such loans along with the rate of interest :

1. SBI Top-up Loan – 8.95% to 10.25%
2. HDFC Top-up Loan – 9.20% to 9.70%
3. ICICI Bank Top-up Loan – Starting at 55%
4. Axis Bank Top-up Loan – 8.80%
5. IDFC Bank Top-up Loan – Up to80%
6. Bank of Baroda Top-up Loan – Starting at 9.15%

MoneyView also provides you an access to instant loans, if you are looking for some quick funds for any purpose.