Sandeep Paliwal suddenly found himself to be in a fix. He needed money for an urgent medical requirement. While his credit cards had the limit to cover the expenses on this exigency, but he knew that he would not be able to repay the complete amount in one go. Being a financially cautious individual, he did not want to revolve the credit for high interest rates getting charged on cards outstanding. He started to weight the options available to him and decided to go in for a personal loan. Sandeep has also been running a home loan for the last 8 years and one of his friends advised him to take a top-up loan on the same as against picking up a personal loan.
Sandeep was initially not convinced to be enhancing his home loan amount, but when his friend explained him the following, he went ahead with the suggestion.
1. Promptness of disbursal
A personal loan is known for speedy decision. This is one of the major reasons what makes is a popular choice when it comes to arranging funds in a jiffy. But a home loan top-up is equally fast in disbursal once you have put up the request. The personal loan application gets processed with speed, but the fact remains that any new loan request will undergo an underwriting process. On the other hand, since the top up amount would only be smaller than the principal repaid for over 7 years, the bank may already have a process around it for a faster decision without the request being reassessed by the underwriter.
2. Lower interest rate
Since a personal loan is an unsecured product, the interest rate being charged on it is much higher. When Sandeep got to know that he would be charged a rate of 16% as against 10% that would be levied on the top up amount, his decision swung towards going ahead with the top up only. Needless to say that a higher rate of interest will eat into the finances.
3. No restriction of usage
Akin to the personal loan, a home loan top up does not restrict the utilization of loan proceeds. Sandeep was not clear on this and since his requirement was to fund that medical exigency, he thought of taking a personal loan. The top up loan can be utilized for any purpose and that makes is equally good on this front as the personal loan.
4. Smaller EMI
Since the loan term on the property is available for a longer period, the monthly outflow on the EMI is also lower. The borrower thus can be at ease in case a sudden increase in EMI will lead to an imbalance in the budget. Since Sandeep did not have such concerns, he decided to pay a higher EMI. On the increased amount, he had the EMI matched to the installment that he would have otherwise paid on the personal loan. He was happy about the fact that the increased loan amount would get repaid in the same term as would have the personal loan and he was saving the money on account of the lower interest rate being charged.
5. No pre-payment penalty
Unlike a personal loan where generally a 4% pre closure charge gets levied, the top up loan does not have any such associated cost. The borrower can decide to pay part or complete amount at any point of time without any restriction. This was another factor that excited Sandeep since he could utilize a part of his bonus to prepay the loan without worrying about the additional charge.
6. Tax benefit
As we all know that the housing loan entitles one to tax benefits, you can also avail tax benefits on a top-up loan if certain conditions are met. This would further reduce the cost of funds.
When Sandeep got to know about this he was super excited and was grateful to his friend for his sound advice. Just like Sandeep, anyone who is running a home loan can extract the benefit of a low cost fund available within a short span of time to address the need that may be glaring in the face. But the piece of advice would be to avail any loan only when it is needed and one is able to manage the finances with care.
(By Arun Ramamurthy, Director & Co- Founder, Credit Sudhaar)