Nov 2, 2015, 08.00AM IST | Economic Times
Arvind is an IT professional, living in a metro with his wife and children. His income has been steadily rising over the last 10 years. The family leads a comfortable life, despite servicing a home loan taken eight years ago. Arvind’s wife now wants to renovate the house. The family had not planned on or saved for this expenditure. Arvind is unable to spare any funds and he does not want to draw from his existing investments. Since the renovation is going to be a one-time expenditure, his wife suggests that they take a personal loan. Is that the right thing to do?
Arvind is not keen on going through the hassless of applying for a new loan. Since he already has a running home loan, his financial adviser suggests taking a top-up loan, which would be a better and faster option than a personal loan. Arvind will be eligible for a top-up loan now since the original loan was taken eight years ago and he has been diligently paying all the EMIs towards repaying that. Moreover, thanks to the steady rise in his income, he will be eligible for a sufficiently big topup loan.
Considering Arvind is an existing customer, the documentation and the overall process will be fast in case of a top-up loan as there is an existing relationship and the history is known by the lender. Moreover, with a top-up loan, he gets the benefit of a longer repayment tenure. The maximum tenure for a personal loan is 5 years while a top-up loan’s tenure could go up to the remaining tenure of the home loan. Also, the interest rates on top-up loans are lower than a personal loan. A personal loan is unsecured, while the top-up is an additional home loan secured by the property. Additionally, Arvind will be able to seek tax benefits as he plans to utilise the top-up loan amount for renovating the existing house.
For someone like Arvind who has a good repayment track record, availing a top-up loan may work out to be an efficient solution. He would get the benefit of a secured loan (lower interest rate and EMI, longer tenure) without having to mortgage a new asset. He should, however, review the insurance cover for the loan and ensure that it is also modified to cover the new increased liability.