Should You Take a Personal Loan
or a Top-up Home Loan?

While personal loans and home loans are both ways to get the finance for making the big purchases you need they have some individual characteristics.

Characteristics of a Home Loan

1. Home Loans are in general high in terms of loan amount
2. They are taken for long tenures - usually between 20 - 30 years.
3. Home loans come at a low interest rate
4. The lender keeps the property deeds as collateral (the borrower can continue to use the home to live in or rent out)
5. A home loan is given only for the specific purpose of buying a home.
6. After the loan gets repaid in full, the borrower can get the deeds to the house.

If the borrower defaults and is unable to pay off the loan before it is fully paid, the lender can auction the property and keep the proceeds.

Characteristics of a Personal Loan

1. Personal loans are smaller loans that don't exceed more than INR 25 - 30 lakhs in terms of loan amount.
2. Loan tenures are shorter periods of time - between 12 - 60 months.
3. Personal loan interest rates are higher than those of home loans.
4. These are unsecured loans, and the borrower is not required to pledge any collateral.
5. Personal loans are used for sudden or large expenses – such as medical expenses, marriage expenses, higher education expenses, travel or home renovation.
6. Personal loan eligibility criteria are more stringent and lenders usually accept applicants with a good credit history and credit score.

Personal Loan vs. Top up on Home Loan

If you are pondering over this question, you are probably looking for additional funds to renovate, redesign or furnish your new home.

The points of difference that you may consider are: 

• Cost of the Loan – Rate of Interest and Other Costs – Home loan interest rates are always lower than personal loan interest rates. So, if you can get a top-up on your home loan you will end up paying lower rates of interest on the amount borrowed. Top-ups may carry a slightly higher rate of interest than the rate at which the original home loan was given but even so it would be lower than the rate on personal loans.
  However, you should also note that while the interest may be lower, the tenure is also extremely long. This means that over the loan tenure, you may end up paying more interest than you probably would for a personal loan. If the amount you need is small, it may be better to go for a personal loan rather than a home loan. Please also consider that getting a new loan may involve certain costs like processing fees.
• Term of the Loan – Home loans are for very long periods of time. When you avail of a top-up loan the loan is divided over the period remaining in the original loan. Thus you have a longer repayment period in case of top-up to a home loan versus term of a personal loan which may be between 12 – 60 months.  However, on the plus side, paying off a loan quickly will reflect positively on your credit report, which means that it would be easier for you to get a loan in the future.
• Application and Approval of Loan and Other Charges – top-up loans are easily available to customers who have a good repayment history and a good credit score. Thus one does not need to get into the application and approval procedure, which may be a longer and more tedious process as the lender will firstly determine personal loan eligibility and verify your documents before approving the loan. On the other hand, if you need the funds urgently and have the necessary documents handy, you can apply for a personal loan online and expect to get the funds you need within 48 hours (subject to eligibility). A top-up on a home loan may take a while depending on your relationship with your lender as well as your eligibility, which includes your debt-income ratio. 

Overall – keeping in mind the above criteria, you can decide which loan will be best for you.

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