Personal loans explained: Should you opt for a top-up or a fresh loan?

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When you need more money after having already taken a personal loan, you generally have two options: take a second loan or apply for a top-up on the initial one. Both give you access to more money but differ in terms of eligibility, charges, and convenience. Making the right choice spares you from higher interest charges and more documentation.

What is a top-up loan?

A top-up loan is a second loan provided by your current lender in addition to your current personal loan. It is provided only to good-repayment credit borrowers, typically after paying a minimum number of EMI installments without default. Since the lender already has an idea about your credit and repayment history, there is faster sanctioning, minimal documentation, and lower rates of interest than a new personal loan.

What is a new personal loan?

A new personal loan is a completely standalone loan for which you can apply with any bank or NBFC, not at all your existing lender. It involves fresh eligibility verification, papers, and processing. Interest depends on your income, credit score, and lender terms. While a new loan allows the convenience of choosing a lender or negotiating the conditions, it will also be more expensive with extra processing fees and, possibly, a higher degree of interest rate.

Cost and convenience comparison

Top-up loans are less expensive and convenient, especially if you already frequently repay an open loan. Since they are lower in interest and they carry less paper, they are affordable for most borrowers. If your current lender is only offering small top-up loans or a different lender is giving you a better rate, however, a new personal loan would be better. It will depend on how much money you need and what terms are available now.

Which one do you prefer?

If your payment history is clean and your existing lender will grant a reasonable top-up amount, then applying for a top-up loan is usually the way forward. It is faster, easier, and probably cheaper. But if you require an amount higher than that which is allowed to be transferred through the top-up, or if some other lender is offering much lower interest rates, then a new personal loan is one that should be sought out. Including comparison of the cost of the whole loan, EMIs, and repayment service is essential.

FAQs

Q: Will a top-up loan affect my credit score?

Yes, similarly to borrowing in any other way, a top-up loan will put you in higher debt generally and will appear on your credit history. Payment on time, however, will improve your score in the long run.

Q: Can I take a top-up loan from another bank?

No, top-up loans can be taken only from your current lender. To take from a different bank or NBFC, you would have to take a new personal loan.

Q: Is the interest rate of top-up loans always lower than that of new loans?

Not necessarily, but most lenders do offer top-up loans on slightly improved terms because they already have your credit history. It is still prudent to shop around and compare prices before deciding.