Is Opting for a Top-up Home Loan Better than an Education Loan?

Higher studies, either in India or overseas, demand a substantial cash reserve. Hence, most parents avail of education loans which are specifically designed to meet these requirements. The loan enables you to cover the tuition fees for the entire course, accommodation, food, travel and other associated expenses. It is an unsecured loan and hence, does not need a collateral. There is, however, another viable alternative to this credit facility - a Top-up Loan.

What Is a Top-up Home Loan? 

A Top-up Loan is an additional loan over and above an existing Home Loan. This is usually a more cost-effective and convenient financial solution than applying for another loan when one is in need of funds. In such situations, if you are already servicing a housing loan and possess a healthy repayment record, you can easily request your lender for a top-up of the required amount. 

How to Apply for a Top-up Loan? 

Since a Top-up Loan is extended to existing customers, lenders have all the information they need to establish an applicant’s Top-up Loan eligibility. They may not undertake rigorous verifications but could levy a processing fee. Check with your lender whether there are any other charges involved. Usually, a top-up is disbursed within 48 hours*. 

Eligibility Criteria and Documents Required for a Top-up Loan 

You can apply for a top-up loan if you already have a Home Loan and have repaid at least 6 to 12 EMIs with a good track record. There are no additional documents required when applying for a Top-up Loan, although your lender may ask for your latest salary slips and bank statement. They might also conduct a technical evaluation of the property for which you had originally availed the Home Loan.  

However, new customers who have shifted their Home Loan balance may have to go through the approval process, which will be similar to the procedure for securing a new house loan.

Applying for an Education Loan  

Processing an education loan could be more extensive due to its unsecured nature. You need to fulfil various loan parameters laid down by lenders such as the education loan eligibility criteria, documentation requirements and other specifications that will include students’ details like academic records, certificates, diplomas, degrees, acceptance letters from the university, etc. Some lenders may offer a top-up on an existing education loan as well.

The Difference Between Education Loans and Top-up Loans 

Education loans or study loans are tailored for students pursuing higher studies. Borrowers should weigh the pros and cons of both loan types to get the maximum benefits. Given below is a closer look at a Home Loan top-up vs an education loan: 

Interest Rate 

Education loans usually have a higher rate of interest as compared to a top-up Home Loan, which is essentially a secured loan. A top-up is normally tendered at just 0.5% to 1% above your Home Loan interest rate. A lower interest rate on your Top-up Loan can make your loan cheaper.  

Repayment Tenor 

Lenders may offer you a Top-up Loan tenor that might be the same as your existing housing loan tenor. A flexible tenor will reduce your monthly outgo and let you combine the repayments along with your Home Loan EMIs. For example, if you need a loan of Rs. 11 lakh and compute the cost of both a Top-up Loan and an education loan at 8.20% interest, the two options will present different EMIs. The monthly instalment on a Top-up Loan taken for 12 years will come to Rs. 12,028 EMI. As education loans have a shorter tenor, the same loan for 8 years will cost you Rs. 15,662 each month.  

Also Read: How to Pick the Best Home Loan Tenor that Suits Your Budget 

Total Cash Outflow 

The total outgo on an education loan, inclusive of interest, will stand at Rs. 15,03,590 – without the moratorium pre-EMIs. A Top-up Loan, on the other hand, entails a net cost of Rs. 17,32,023. But if you pre-close the top-up in the 8th year, you can save around 2.3 lakh towards the balance loan interest. This shows a similar outflow for both loans, nonetheless, a Top-up Loan can be easier on the pocket and provide the flexibility of comfortable EMIs. 

Loan Approval 

It is comparatively easier to apply for a Top-up Loan rather than an education loan. The latter may entail exhaustive paperwork and one may need to produce loan security and guarantors in some cases. 

Repayment Tenor 

Top-up Loan repayments begin immediately after disbursal, while an education loan extends convenient provisions of a waiting period before commencing loan repayments, although the interest accrues for that duration.  

To Conclude 

While a Top-up Loan accords you pocket-friendly EMIs and higher loan amounts, an education loan grants you repayment flexibility and tax exemptions. Use a Top-up Loan calculator and an education loan calculator to check the feasibility of both loan types and to compare schemes from other lenders.  

If your present lender doesn’t offer the requisite top-up, you can find a lender who extends lower Home Loan interest rates and a more competitive Top-up Loan. You could then shift your outstanding loan balance to the new lender provided you meet their eligibility for a top-up education loan. A Home Loan balance transfer will enable you to bring down the loan cost and, at the same time, avail of an attractive top-up to further your child’s career prospects without any hindrances.

Also Read: Reasons to Opt for Home Loan Refinancing 

*Terms and conditions apply.