What Is A Personal Loan Top-Up And When To Consider It?

A top-up under your personal loan allows you to take an additional amount of money over and above what you already have in your personal loan. You are not required to apply for a fresh loan or go through the whole documentation process again. Instead, the lender will look at your repayment history and, if good, give you more credit from the same loan account.

This is usually possible only from your current lender. You should have paid some number of EMIs on your original loan before you qualify. The lenders may also consider your credit score, outstanding as of today, and income before they approve a top-up.

Why Take a Top-Up Rather Than a New Loan

The major cause of the popularity of top-ups among borrowers is convenience. Since your lender has your details and repayment history beforehand, they are able to finalise the loan in minutes. With medical bills, unexpected repairs on the house, or urgent visits, this swiftness is priceless.

Another advantage is that top-up loans are unsecured, just like the majority of personal loans, meaning you do not need to provide security or collateral. Typically, there are no stipulations regarding what you can spend the loan on.

Top-up loans are generally available at rates equal to your existing loan. In some cases, if your credit record has turned around or if market conditions are favourable, you might even be offered a better rate. Top-up loan interest rates currently range between 10 per cent and 14 per cent annually, depending on your income and credit rating.

When a Top-Up Loan Makes Sense

Top-ups are useful when you need additional funds and have a good track record with your current loan. This can include situations like funding an emergency, dealing with a short-term cash flow issue, or consolidating multiple debts into one.

For example, if you are paying substantial interest on credit card payments or small loans, you can use the top-up limit to pay those off and have one loan and one EMI, possibly at a lower rate. In such cases, top-ups are not only hassle-free but also about improved debt management and interest savings.

Factors to Be Careful About

While top-up loans offer many advantages, they also increase your total debt. This means your EMI may go up, or your loan tenure may stretch further. It’s important to consider your current income and monthly obligations before taking on more debt.

Additionally, personal loan interest rates have also been rising of late. With the central bank's decision to increase risk weightage on personal loans towards the end of 2023, lenders raised their interest rates by 0.30 to 0.50 percentage points. So your top-up loan might be pricier than your original loan.

It's also worth checking if there are any other charges—such as processing charges—on the top-up value. Some lenders impose them even if your existing loan didn't have any charges.

How to Check Eligibility

To qualify, you typically must have paid at least 6 to 12 months of on-time EMI instalments on your existing personal loan. A good payment track record and a credit score of more than 750 will further improve your chances. Your income would also have to be stable enough to accommodate a higher EMI or extended tenure.

If you’ve missed payments in the past or your debt-to-income ratio is already high, your application may be rejected or offered at a higher rate.

A personal loan top-up can be a smart way to access more funds without the time and effort of starting a new loan application. It’s convenient, quick, and may even come at competitive rates if your credit profile is strong.

But don't consider this as free money. Consider this as an extension of your loan, not as free money. Utilise it for real needs, not for discretionary spends. Carefully consider your financials before agreeing to take one and ensure the new EMI does not strain your budget. If used judiciously, a top-up loan is a useful financial planning tool.