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Top-up Loans vs. Personal Loans


Time to read: 3 mins | May 06, 2017

Every individual aspires to have a dream home. To fulfil that dream, you need a good amount of money. Banks provide home loans to individuals to support them and to ease the construction of homes or apartments. With a home loan, individuals do not have to worry about the cash crunch; rather, they just have to pay each month’s instalment for specific years and built the house.

The major problem people suffer while availing the home loans is the need of extra cash during construction of the house. It often happens that you need extra money other than a home loan to finance the property construction. This is because the material rates keep on fluctuating; the interior cost shoots up, etc. To meet these requirements banks provide top-up loans to individuals.

What is a Top-up Loan?

Top up loan is a credit facility given by banks and housing finance companies to borrow money over and above the home loan. This facility is available to those who pay EMIs on time and hold good track record on the books of financial institutions.

An individual who has availed housing loan can also take personal loans to meet the need for extra cash during construction of the property.

What is a Personal Loan?

Personal loans are general purpose loans which can be used by an individual as per his discretion like investing, paying debts, home construction, etc. Personal loans are difficult to get and have strict qualification requirements.

Top-Up Loans vs. Personal Loans

Let us compare the top-up loans and personal loans from the point of view of an individual who is constructing a property:

Ease of Getting Loan: If you have taken a home loan from a bank or housing finance company, you can easily get a top-up loan over and above the loan amount. For that, you must have paid the EMIs at regular intervals and never been on the defaulters list. In the case of personal loans, the qualification requirement is strict. If you have a bank account with a good credit score then availing a personal loan is relatively easier.

Interest Rates: The interest rate charged on top up loans is relatively lesser than personal loans. The rate of interest charged on the top-up loan is 1 to 2.5 percent higher than the interest charged on home loans. The processing fee charged on top up loans is up to 2.5 percent. However, when compared to personal loans, top up loans are very cheap.

Usage: Top-up loans can be put to use only for property construction as it is available over and above the home loan already availed by an individual. But, the individual can use personal loans for a variety of needs. The use of Personal loans is at the individual’s discretion. It can be used to construct property, or for investing, debt payment or to meet wedding expenses, etc.

Security: The top-up loans are secured against the asset. The property against which home loan is taken acts as a collateral security for top-up loans. Whereas, in the case of personal loans, there is no security. Personal loans are unsecured. The major reason why personal loans are unsecured is because the individual availing the loan facility has a bank account and has a good credit rating. Thus, the bank is assured that the personal loan amount would be recovered.

Tax Benefit: The proceeds of the top-up loan are utilised in constructing a home. The Income Tax Act provides a benefit under section 80 C on principal loan repayment and benefits for interest payment under section 24. On the other hand, tax benefit in case personal loan depends on how the individual uses the proceeds of the personal loan. Like, if the proceeds of personal loans are used for wedding, no tax benefit will be available but if the proceeds of the personal loan are utilised for constructing the property, the tax deduction is available just like in the case of a top-up loan.

Selecting the right kind of loan for the right purpose is very important. Banks provide loans for almost everything. If you are constructing a property then a top up loan should always be your first priority. There are two simple reasons for it; firstly these loans are meant especially for those individuals who have taken a home loan and are in need of extra money for constructing the property. Secondly, the rate of interest charged on the top-up loans is very less as compared to personal loans. So it is wiser to opt for top-up loans if you are constructing a property. You can contact your bank to seek their expert advice and help you pick the right kind of loan.

NOTE WORTHY

Top up loan is a credit facility given by banks and housing finance companies to borrow money over and above the home loan.

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