Top-Up Loan Considerations: Navigating the Disadvantages

Existing loan borrowers, i.e. individuals repaying a home loan or a loan against property, can avail of an additional loan, over and above the loan they have already taken. This loan is known as a top-up loan and it offers many benefits. To start with, since these loans are granted to existing clients whose document file the lender already possesses, loan sanction and approval take only a few days. In other words, if you avail yourself of a top-up loan, you can expect to see the loan money in your account, within only a few days of applying for the loan. Therefore, top-up loans on home loans and loans against property have become an ideal way of handling financial emergencies. More importantly, top-up loans come with zero end-use restrictions. In other words, borrowers can use the loan money to meet personal as well as professional needs, without having to answer any questions regarding how the money is being spent. Lastly, top-up loans on home loans or loans against property attract a low rate of interest, which makes these financing tools an ideal option for arranging the money needed to take care of contingencies and one's other needs.

However, there are certain disadvantages associated with these loans and if you are planning to avail yourself of a top-up loan on your home loan or loan against property, you must move ahead keeping these disadvantages in mind. 

Disadvantages of a Top-Up Loan

1. The biggest disadvantage of a top-up loan is that these loans are sanctioned only to existing customers. If you are currently repaying a home loan or a loan against property, you will be eligible to apply for these loans. Similarly, you will also get the option to apply for top-up loan if you apply for a home loan balance transfer or a loan against a property balance transfer. The limited eligibility is a major advantage associated with these loans. Further, not every home loan or loan against property borrower is eligible for these loans. Only those borrowers who have not missed more than one EMI over the last one year can apply for these loans.

2. The second disadvantage associated with these loans is that one can claim tax benefits on these loans only in very specific cases. For instance, if you avail of a top-up loan on your home loan to put your child through college, you won't be able to claim any tax benefit on the payments made. However, if you use the loan money to reconstruct or remodel your house, you can claim tax benefits on your loan. If you are planning to avail yourself of a top-up loan, it is always a good idea to talk to an expert and get clarity on whether or not you qualify for top-up loan tax benefits. 

3. Top-up loans increase an individual's loan burden. If you avail yourself of a top-up loan over and above your current loan, your loan EMIs will increase. Repaying a higher EMI can become burdensome if you have not planned your repayment strategy properly. Furthermore, missing EMI payments for an extended period can cause an individual to lose ownership of their property. Therefore, one must avail of top-up loans after thinking things through. 

Top-up loans have many advantages. However, one must keep in mind their affordability when deciding the top-up loan value. This will save them from any kind of future trouble.