Pros and Cons of Top-Up on Personal Loans - Personal Loan Blog - Tata Capital

Personal Loans Top-ups Pros and Cons

Feb 28, 2017

Borrowing a loan is the best option during a cash crunch as it provides the required finance at the right time. You may then use the disbursed amount to fulfill your dreams and responsibilities.

Sometimes financial difficulties make it necessary for you to borrow additional cash in spite of having an existing loan. Such a facility provided by lending institutions is known as a top-up. Lenders allow existing customers to borrow a certain amount over and above their existing loan, subject to the required conditions as set by the lender. A top-up facility is beneficial if you are in urgent need of funds.

However, there are some pros and cons of availing of a top-up on loans.

Four advantages of a top-up on personal loan

1. Quicker approval process

As you have already gone through the process of loan application earlier, the process to avail of a top-up facility becomes relatively simpler. Additionally, the verification process is simple and gets completed quickly.

2. No collateral requirement

Most financiers offer a top-up on a loan without requiring any security against the loan. This is because the same lender has sanctioned the loan in the past and perceives you to be a risk-free individual.

3. No restriction on spending

While seeking a top-up on a personal loan, the financier does not question the intent of borrowing. Hence, you may borrow for any reason like renovation work, medical emergencies, further education, and international holiday, besides others. You may also obtain a higher amount if you have serviced the loan for a longer tenure.

4. Tax benefits

You may avail of tax benefits on a top-up loan. However, the benefits are dependent on the purpose for which the loan is used. In case the loan is used for educational purposes, you may enjoy deductions under Section 80E of the Income Tax Act. Similarly, you may also obtain tax benefits under Section 24 of the Income Tax Act if the loan is used for home improvement.

Disadvantages of top-up on a loan

1. Benefit only for existing customers

One of the biggest disadvantages of a top-up is that only existing customers of the financial institution may avail of this facility. Besides, those customers with a low credit history have a decreased chance of receiving an approval.

2. No tax advantage for other purposes

Tax benefits are applicable only on loans that are taken for educational purposes and renovation of home or construction activity. Finance borrowed for any other reason is not tax-free and hence, cannot be claimed for any deduction.

A top-up on a personal loan may be taken for a variety of reasons, namely home renovation, purchase of property or consumer durables, to meet business requirements, for child's education and marriage, besides others. It acts as a great contingency during times of financial troubles. You may, therefore, choose to opt for such an option after analyzing the pros and cons of such a loan.