Want loans fast? Try a top-up

These days, if one is short of funds for any purpose, a loan is not tough to get. If you have the proper documents, you can get a loan within a few days. But if you already have an existing loan with a bank or a non-banking finance company (NBFC) and are in need of urgent funds, you could consider a top-up loan.

It is a loan that is given over and above the existing loan and can be availed across all the categories - personal, business, home, vehicle or any other secured loan. With festival season around the corner, the time when people make some of their biggest purchases and take up home renovation work, there is a surge in demand for all types of loans, said lenders. Let us see how a top-up a loan works and what are the conditions that lenders will consider before approving a loan.

"A top-up loan essentially provides an incremental loan to the customer with minimal documentation and is usually at a same or lower rate of interest than the existing loan," said Ajay Pareek, head - urban business, Fullerton India Credit Company.

The most common top-up loans are personal and home loans. A top-up personal loan can be availed to cover financial emergencies, education, wedding, travel, and medical expenses. A top-up home loan, on the other hand, can be used for extension or renovation of homes. Top-up loans are a preferred financing option because of competitive interest rates and easy approval.

"With the festive season approaching, we see a higher demand for personal loans and top-up. Loan amounts also see an uptick during the pre-festival and festival time,'' said Navin Kukreja, CEO and co-founder, Paisabazaar.com.

Home-loan top-ups are the most popular, said Navin Chandani, chief business development officer, BankBazaar.com. 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 equated monthly installment at regular intervals and never been on the defaulters' list.

"Top-up home loan interest rates are quite lower than personal loans, credit cards or car loans. Top-up loans are also available for a longer tenure. Their approval process is also much simpler. There is also an associated tax benefit if you use them for home repairs, construction or extension, or to fund your or your children's education. So, often people opt for a top-up loan instead of taking a personal loan or even an education loan,'' said Chandani.

Faster processing

Customers tend to opt for a top-up loan instead of a fresh personal loan, especially at times of emergency, as top-up loans are processed quickly because the lender already has the customer's information and behaviour/repayment pattern.

"Usually, most lenders would have a pre-qualified top-up offer for their existing customers,'' Pareek said.

Most lenders work on risk-based pricing. In case of a secured top-up loan, like home loan, the borrower will have to undergo re-evaluation and mortgage process of the property against which the loan is availed.

Eligibility and disbursal of top-up personal loan is much simpler and quicker vis-à-vis top-up home loan. With no collateral requirement and minimal documentation, a personal loan can be disbursed quickly, within one to two days, said Kukreja.

Processing and disbursal of a top-up home loan takes comparatively more time (up to one week), given that it involves determining the valuation of property to finalise loan disbursal amount, as per the loan-to-valuation.

"Since the lender has access to all the relevant documents (know-your-customer, proof of income, residence address, etc), the customer does not have to reproduce the required documents and thus saves time. Also, if the repayment history is good (with no delay in payments/cheque bouncing and other similar issues), the loans are sanctioned and disbursed faster," said Tata Capital MD Kusal Roy.

Interest rates

Typically, a top-up loan is available at a more competitive rate of interest. This is because the credential of the borrower is already established in his/her first stint at borrowing and the top-up loan is sanctioned to encourage him to maintain good financial behaviour whilefulfilling his aspirations, Pareek explained.

However, in the case of home loans, interest rates for a top-up are usually 0.5-1% higher as compared to your existing home loan.

Amounts one can avail

The amount of top-up loan that one can avail depends on a number of factors. Income, repayment capability and other loan obligations are some factors that are taken into consideration when deciding the top-up loan amount.

In case of a top-up home loan, the maximum top-up loan sanction cannot be more than the value of the initial loan. The upper limit is determined by the bank. This can be anything from a couple of lakhs to as much as a crore. "However, the total of the balance home loan amount and the new top-up loan amount should not exceed 70-80% (differs from bank to bank) of the value of the property," said Chandani.

Repayment period

Top-up loans are typically available for up to 20 years, or until the balance tenor of your original home loan, depending on the bank's discretion. However, the tenor also depends on your profile, income, age, value of property, etc.

Conditions to keep in mind

While approving a top-up loan request, the past repayment record of the borrower is given major weightage. A consistent repayment record boosts the chances of loan approval and also increases the likelihood of getting a higher tenure. Other factors which come into play while approving loan request include borrower's existing debt to income ratio and credit profile.

"Apart from a low credit score, lenders generally also hesitate in lending to borrowers whose debt to income ratio exceeds 40-50%,'' said Kukreja.

The implication of a top-up loan on your credit score is similar to any other loan. Timely and full repayments of loan's EMIs, without any delay or missed payment, will assist in building a favourable credit history and build up a high credit score for the borrower. Whereas, any default would show up in your credit history and adversely affect your credit score.