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Many of us take different types of loans throughout our lifetime. Repaying loans within the due period is a sound financial practice. However, often situations may so rise that we fell the need of some more money in the middle of the repayment term of a loan. To meet this demand, banks offer top-up facility. But what are the eligibility criteria of taking a top-up loan, when you have an ongoing loan? Money9 gives you a six-point guide for top-up loan.

Top up loan

This financing option comes as an add-on to the existing loan amount for a home loan and personal loan. A top-up loan is provided to customers who have an existing relation of minimum one year with the bank or lender. It can be availed by those who have a good credit score, have sufficient repayment ability and good loan repayment track record.

Eligibility

Fast and foremost the person has to have an active loan account with the lender and he/she should have paid all previous EMI within due time for at least 12 months or more. It is provided when the borrower has repaid a certain portion of the existing loan. Besides, applicants must have a stable job and sufficient income to repay the new loan within the due time period.

Basic features

The top-up loan is available for the time period of the primary loan, be it housing loan or personal loan. Tenure beyond the primary loan is not permitted in top up loans.

The amount generally varies from bank to bank, but that is not more than 70%-75% of the outstanding value. On the other hand, the interest rate of top up loan is at par with the primary loan.

Benefits

The interest rate of top up loan is usually the same as the previous one. Application for top up loan can be processed within few hours, as almost all the documents are available with the bank.

Since you have timely repayment record, banks would be comfortable in giving you a new loan. One can avail additional tax benefits also with a top up home loan. A top-up loan can practically be used for any purpose.

Disadvantages

Top-up loan is an existing loan like an auto, personal or home loan increases the principal amount owed.

For home loan customers, the buyer can only avail the top-up loan as per the outstanding amount of the home loan through repayment. Even if the property witnesses a price appreciation, the quantum of top-up loan cannot be increased. Besides no new customer can avail the top up facility.

Tax benefit

A home loan normally provides tax benefits such as deduction of up to Rs 1.5 lakh on principal amount repayment as per section 80C of the Income Tax Act. Borrowers can also get up to Rs 2 lakhs of deduction towards interest payment in a financial year under section 24. For a top-up on a home loan, borrowers can also claim tax benefit.

But top up of a personal loan is not eligible for any type of tax holiday, as personal loan itself does not come under this category.

Bottom line

Expert advice that a top-up should be applied for only when absolutely necessary.

It should not be taken just because it is available. It would raise the EMI burden on you.