Is a loan top-up a smarter choice than taking a new loan? How to decide

Dubai: Life is unpredictable, and so are our financial needs. Imagine you’ve taken out a loan to buy a home or a car, but suddenly, you find yourself needing extra funds—perhaps for home renovations, medical expenses, or an unexpected financial setback.

In such situations, you have two choices: apply for a brand-new personal loan or opt for a top-up loan on your existing loan. But which option is better?

Top-up loan: A boost for existing borrowers

A top-up loan acts as a financial booster for those who already have an active loan. Financial expert Rupesh Naish explains, “A top-up loan is usually a preferred option because it comes with a lower interest rate compared to personal loans. It’s also quicker to process since the lender already has your details.”

Additionally, top-up loans offer longer repayment terms, which means lower monthly payments, or Equated Monthly Instalments (EMIs). This makes them a more manageable option for many borrowers.

Top-up loan vs. personal loan: Key differences in interest rates

While top-up loans typically carry interest rates similar to your original loan, they can be more challenging to qualify for. In contrast, personal loans, though easier to obtain, often come with higher interest rates and stricter repayment timelines.

“Not every borrower is eligible for a top-up loan,” Naish points out. “Banks usually approve them only for customers with a strong repayment history and a good credit score.”

It’s also important to note that top-up loans increase the principal amount of your existing loan. If you plan to sell your home or car before paying off your loan, you will have to clear the top-up amount first. This isn’t the case with a separate personal loan.

What does ‘equity’ mean in loans?

Equity is the difference between the market value of your property and the amount you owe on your loan. The more payments you make, the more equity you build. If you take a top-up loan on a mortgage or auto loan, you reduce your equity, which means you own less of the property until the loan is repaid.

Real-life example: Should you go for a top-up loan?

Let’s consider a scenario: A 35-year-old UAE resident took out a Dh6 million home loan five years ago. He now wants to build an extra room in his house and needs Dh500,000. He can either take a new personal loan (which involves more paperwork and higher rates) or get a top-up loan (which offers faster approval and lower interest).

With a top-up loan, he avoids additional paperwork and processing fees, making it a hassle-free option.

Are you eligible for a top-up loan?

Banks typically offer top-up loans to borrowers who:

Final takeaways: When should you opt for a top-up loan?

If you find a top-up loan with a lower interest rate than a personal loan, it’s often the smarter choice. However, it’s important to:

As financial consultant Rajesh Markara warns, “Missing loan payments can have serious consequences, including penalties and a lower credit score. Always ensure you can comfortably manage the repayments before taking on more debt.”

Whether you choose a top-up loan or a new personal loan, the key is to borrow responsibly and plan ahead!