Unveiling the Disadvantages of Top-Up Loans

Top-up loans are additional loans taken on top of current home loans. These serve as personal loans. Banks and financial institutions offer top-up loans only to existing customers. The tenor of such a loan may vary, extending up to 20 years based on the home loan repayment tenor. A top-up loan may seem like a great opportunity to overcome financial hurdles regardless of the purpose as it can be utilized to meet any type of expenses. It is also easily available since the lender already has run a background check on you and your eligibility for a home loan and would require minimal documentation, However, despite all the positives, there are quite a few cons of taking a top-up loan, which most individuals are tend to overlook. In this article, we will unveil the disadvantages of top-up loans so you are well-informed before signing on the dotted line. 

The total amount combining the existing home loan and top-up loan should ideally be equivalent to only 80% of the total property value. Let’s say you avail of a home loan on a property worth INR 30 Lakhs. After repaying INR 15 Lakhs, you consider taking a top-up loan. The maximum top-up loan amount that can be issued by the lender is INR (15+8) Lakhs = INR 24 Lakhs, which is 80% of the total property value.  

5 Disadvantages of Top-Up Loans You Should Know About 

Like all financial tools come with pros and cons, and so do top-up loans. Here are the five major disadvantages of taking a top-up loan – 

• Restricted to Existing Borrowers Only 

Top-up loans are offered only to existing customers i.e. customers who already have a loan sanctioned on their name and are currently repaying it. Individuals with poor credit history or CIBIL scores are not considered for the top-up loan facility. 

• No Tax Benefits 

Top-up loans taken for personal purposes are not eligible for tax exemptions. Tax benefits are exclusively offered on loans taken for construction or home renovation purposes. 

• Zero Impact on Capital Appreciation

One of the many disadvantages of top-up loans is that customers can avail of it as per the outstanding loan amount through repayments. Thus, even if the property sees capital appreciation, the amount of the top-up loan remains the same.  

• EMI Goes Up 

When you opt for a top-up loan in addition to an existing home loan, the total repayment amount increases meaning that the equated monthly installments or EMIs will also go up. This will automatically add to your financial obligation if you do not have surplus funds. 

• Principal Amount Remains Fixed

The principal amount for a top-up loan is determined on the basis of the outstanding home loan amount during repayments. Although this amount varies depending on the lender, it generally accounts for 70-80% of the property’s market value. 

Summary 

Potential borrowers should be well aware of the policy terms and conditions before taking a top-up loan. Sooner or later, financial liabilities and problems may force one to apply for a loan but knowing about the disadvantages of top-up loans can help you determine the right principal amount, and monthly EMIs, protect your interest and avoid any charges. Only take out an amount that you will be comfortable paying off to make sure the EMIs repaid on time. Seek financial assistance from an expert, discuss the various pros and cons, and sign the deal only if you think the loan is in your favour.