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Top up home loan vs personal loan – a comparison to determine the better choice for loans

Two kids in a beech playing with a drum. The image is labelled as 'Top up home loan vs personal loan
  • Jun 19, 2019
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Top up home loan vs personal loan – a comparison to determine the better choice for loans

Taking on a loan of any kind is a financial responsibility. It is a debt that needs to be repaid, in full, based on the tenure chosen by the borrower. Most banks, housing finance companies and non-banking finance companies offer a myriad of loans to finance the different needs of customers. While it is best to opt for a home loan while purchasing a new home, you can also take a top-up home loan on the existing one, if and when you need some extra finance. Another loan option you can explore is the personal loan. However, before you finalise between either types of the loan, you need to consider a few factors. Here’s a comparison between top-up home loan vs personal loan.

Top-up home loan or personal loan – which is better?

Here are a few factors you should consider before you finalise a loan that best suits your requirements.

The loan interest rate: As mentioned above, a top-up loan can be taken on your already existing home loan. The greatest advantage of opting for this type of loan is that it comes with a lower interest rate. This is because the lender considers your home as collateral and does not ask you to provide additional security. As such, you can expect a lower interest rate of approximately 10%. A personal loan on the other hand, is an unsecured loan i.e. one in which you do not need to provide any collateral. This gives the lender the right to charge a higher interest rate; approximately 12%-16% or more. This ultimately results in high equated monthly instalments or EMI amounts.

The loan tenure: A top-up home loan vs personal loan comparison is incomplete unless we address the loan tenure. Home loans are generally available for tenures of 20 years, some-times more. If you take a top-up loan, you can get an extension on the loan tenure. However, your EMI amount may also change. In case of personal loans, you can get maximum loan tenure of up to 7 years and the loan should be repaid within this tenure. As such, it is important to consider the loan tenure before taking on either loan.

The loan disbursal period: If you need funds disbursed within a few hours, then a personal loan is your best bet. Most lenders today provide instant personal loans and the money is credited into your account within 2-4 hours, with minimal documentation. If you need money urgently, you can opt for a personal loan. However, if you have a few days in hand, it is better to wait it out and opt for a lower-interest, top-up loan. Since a top-up loan comes under the home-loans umbrella, your lender needs to reassess your existing home loan. If you have been repaying your home loan on a timely basis, you should have no problem getting this top-up loan within 24-48 hours.

Pre-payment penalties: While talking about the difference between home loan and personal loan in India, we also need to consider the penalties associated with them. Borrowers are not charged with any penalties for pre-payment of top-up home loans as per a mandate issued by the Reserve Bank of India. On the other hand, if you choose to prepay your personal loan before the stipulated tenure, the lender reserves the right to charge you a prepayment penalty. Typically, lenders charge a 4% prepayment penalty on personal loans.

Apart from the above mentioned points you should also consider factors such as the EMI amount and the tax benefits. Ensure you analyse these differences between home loan and personal loan in India before you take a debt on.

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