Taking on a loan of any kind is financial responsibility. It is a type of loan where the borrower needs to repay the loan based on the tenure chosen by the borrower.
Most banks, housing finance companies, and non-banking finance companies offer a myriad of loans to finance the different needs of customers.
While it is good to opt for a home loan while purchasing a new home, you can also take a top-up home loan on the existing one, if and when you need some extra finance. Another loan option you can explore is the personal loan. However, before you finalize between either type of loan, you need to consider a few factors.
Here’s a comparison between top-up home loan vs. personal loan. A top-up home loan or personal loan – which is better?
Here are a few factors you should consider before you finalize a loan that best suits your requirements.
The loan interest rate: As mentioned above, a top-up loan can be taken on your already existing home loan. The most significant advantage of opting for this type of loan is that it comes with a lower interest rate.
It is because the lender considers your home as collateral and does not ask you to provide additional security. A personal loan, on the other hand, is an unsecured loan i.e., one in which you do not need to provide any collateral. A personal home loan gives the lender the right to charge a higher interest rate. It also results in high equated monthly installments or EMI amounts.
The loan tenure: A top-up home loan vs. personal loan comparison is incomplete unless we address the loan tenure. Home loans are generally available for tenures of 20 years, sometimes more.
If you take a top-up loan, you can get an extension on the loan tenure. However, your EMI amount may also change. In case of personal loans, you can get maximum loan tenure of up to 7 -15 years, and the loan should be repaid within this tenure. As such, it is essential to consider the loan tenure before taking on either loan.
The loan disbursal period: If you need funds disbursed within a few hours, then a personal loan is your best. The amount disbursed depends upon the loan agreement and includes deductions for the processing fee and any upfront installment that you’ve agreed to make.
Most lenders today provide instant personal loans, and the money is credited into your account within 2-4 hours, with minimal documentation. If you need money urgently, you can opt for a personal loan.
However, if you have a few days in hand, it is better to wait and opt for a lower-interest, top-up loan. Since a top-up loan comes under the home-loans umbrella, your lender needs to reassess your existing home loan. If you have been repaying your home loan on a timely basis, you should have no problem getting this top-up loan within 24-48 hours.
Pre-payment penalties: While talking about the difference between home loans and personal loans in India, we also need to consider the penalties associated with them. Borrowers are not charged with any penalties for pre-payment of top-up home loans as per a mandate issued by the Reserve Bank of India. On the other hand, if you choose to prepay your credit before the stipulated tenure, the lender reserves the right to charge you a pre-payment penalty.
Apart from the points mentioned above, it would be best if you also considered factors such as the EMI amount and the tax benefits.
Ensure you analyze these differences between home loans and personal loans in India before you take a debt on.