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Top-up Loan or a fresh loan? What should you do?

by Nathan Zachary
Top-up Loan or a fresh loan

As we go through life, different phases demand different plans and actions. And the underlying purpose of these plans is usually finance related. The need for funds can be categorized into long-term, short-term, or a financial emergency. While the long-term and short-term needs depend upon your financial goals, a financial exigency turns up unexpectedly. Buying a house, building a retirement corpus, etc are examples of long-term financial planning. Planning a vacation or business capital shortly requires short-term planning. However, a sudden illness could spiral into an emergency where the need for cash is immediate. These are the various situations when we might need to borrow money and thus, we apply for a fresh loan.

When people think of borrowing money by way of loans, it usually has a negative connotation. Asking for money from friends and family could complicate your relationship due to lack of clarity. Thus, it is always advisable to apply for a fresh loan from a reputed lender. There are many options available and your goals and requirements determine the most suitable loan. Your financing needs can be met through fresh loans or a top-up loan. But before you make this important decision, you should be aware of the various options and understand the difference.

What are Fresh Loans and Top-up Loans?

The nomenclature of these loans is self-explanatory. Let us discuss each of them.

Fresh Loan: A fresh loan is one in which you borrow money from a lender for meeting a particular financial need for the very first time. It could be a secured loan like a home loan or an unsecured one like a personal loan. Say, you have applied for a home loan from HDFC Bank and you do not have a prior relationship with the bank, it is then called a fresh loan. Or, even if the lender is the same (HDFC Bank) but the loan type (you already have an HDFC bank car loan and now you need a home loan) is different, it still qualifies as a new or fresh loan. So, a new or fresh loan essentially is-

  • A new lender, new loan
  • Same lender, new loan
  • New Lender, Same loan (loan take-over cases. From the above example, if you transfer your existing Home Loan from Bank 1 to other Bank to avail of the best home loan interest rates)

Top Up Loan: A top-up loan is the loan one takes over and above an already existing loan. The existing loan could either be a home loan, a personal loan, or any other type. It is an add-on facility offered by lenders to their existing customers. The top-up loan is not mandatorily offered by lenders to its existing customers. It could be offered basis your repayment history and track record.

Say, you have a personal loan from ICICI Bank and you have a further requirement of funds. You could apply for a loan topup on your existing personal loan. Alternately, ICICI bank offers you additional financing based on your good repayment record.

Difference Between Fresh Loans and Top Up Loans

Although the underlying purpose of both these loans is to secure financing, there are a few differences that you should know.

 Fresh LoanTop-Up Loan
Meaning  It is a new loan taken from a borrower to meet a specific financial need.  Top-up loan is a facility provided by financial institutions that allows you to further borrow a certain amount of money over and above your existing loan.
Type of Lender  It is either borrowed from a new lender or taking a new type of loan from the same lender.  It can be availed of from either a new or existing lender
Documentation  A new set of documentation is required.  Minimum documentation owing to the existing relationship with the lender.
Eligibility  Any one that meets the eligibility criteria can apply  It is an add-on facility given to existing customers at the discretion of the lender. It is not offered to all existing customers.
Credibility  Requires a good credit score, income proof, ITR etc to establish repayment capability. Some loans like gold loan do not require a credit score.  Requires good credit history and the customer’s solid repayment track record of the existing loan.
Turn Around Time (TAT) of the Lender  Follows the standard processing time and verification of the lender. The TAT is longer than loan topups  TAT is lesser compared to fresh loans owing to the existing relationship with the borrower

Points to Consider Before Selecting a Fresh Loan or a Top Up Loan

Whether it is fresh or loan topup, it is always advisable to do your research and negotiate for the best terms and conditions. For understanding, let us assume you need additional financing for a home loan.

  • Application Process: The verification and disbursal process for a top-up loan is comparatively faster as you already hold a primary personal loan with the lender. And thus, only minimum documentation is required.
  • Rate of Interest: Compare the interest rate of a new home loan from a new lender with your existing one. If your existing one is cheaper, you could apply for additional funding with your existing lender for the best home loan interest rate.
  • Tenure: The tenure of a top-up loan is until the balance tenure of the original loan. A fresh loan will have a fresh tenure, twenty years for the best home loans. Your decision on a longer or shorter tenure could have a direct impact on your EMIs.
  • Loan Amount: Top Ups are generally pre-approved offers from lenders to existing customers and depend on your current loan and sanctioned limit. In a fresh loan, the sanctioned loan would depend purely on your credit profile and other eligibility criteria.
  • Negotiation: Taking the above example, you can negotiate with your existing lender for a top-up for the best home loan rate possible. It would of course depend upon your solid repayment track and a good credit score, subject to the lender’s approval.
  • Borrowing Options: A loan topup has to be taken mandatorily from the existing lender. However, for a new loan, you can explore more offers and terms and conditions as per your requirement. You can compare the loan amount, rate, duration, and EMI burden before choosing a new lender.
  • Additional Charges: An important point to note is that even in a top-up loan, other additional charges like processing fees apply. However, you can negotiate the terms with your existing lender.

The choice between a fresh loan and a top-up loan would depend on your requirements, present and future situations, repayment capacity, and preferences. Understanding the difference and benefits of both types of loans is the key to making an informed and wise decision.

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