What are top-up education loans?

Taking education loan to pay for the higher studies abroad requires a lot of planning. Not only does it require the borrower to make an exact estimate of tuition fee but also to make a calculated guess of other expenses such as cost of living. However, due to certain factors such as currency rate fluctuation or increase in fee, a student may require to borrow additional amount from the bank to meet the shortfall.

In this blog, Student Cover provides you all the relevant information about top-up education loan and how a student can avail such loan if he or she falls short of finances.

What are top-up education loans?

Top-up education loans refer to the amount given to the borrower by the lending institution, in addition to the existing loan. When a borrower seeks financial assistance from a lender to finance, say, higher education abroad, a particular sum is sanctioned to him or her depending on a number of factors. If a borrower is seeking ‘secured loan’, then the lending institution sanctions the loan amount based on the certain value of the collateral i.e. land, property, Fixed Deposit etc. A top-up loan on this loan would be provided according to the same/different property.

In case of unsecured loan, the sanctioned amount depends on factors such as academic profile(especially GRE Score), credit worthiness(based on credit history of the applicant & the co-applicant), sources of income, job prospect(after completing higher studies) etc. From this sanctioned amount, money is disbursed to the borrower as and when the borrower needs it. A top-up loan on this loan would be provided after reevaluating all the factors previously evaluated.

Illustration: If a borrower needs Rs. 30 Lakhs to finance his or her higher education in the US, the bank may sanction Rs. 35 Lakhs to the student (the sanctioned amount is generally higher than the amount applied by the borrower). The bank would disburse Rs. 30 Lakhs as and when the borrower needs it. However, if, during the course of his study, the borrower needs an additional amount, he can request the lender for a ‘Top-Up’ loan of the needed amount. Since the sanctioned loan amount now is Rs. 45 Lakhs, the bank can offer the student an additional Rs. 15 Lakhs (i.e. The sanctioned amount of Rs. 45 Lakhs = Rs. 30 Lakhs + Rs. 5 Lakhs borrowed as normal loan + Rs. 10 Lakhs borrowed as Top-Up).

Note: NBFCs would only a provide an unsecured loan of upto an amount of Rs. 50 lakhs at the most. Thereby the total of primary loan and the top-up loan amount should not exceed this limit except in extraordinary cases where candidate may have a GRE score of 335 or above.

How to avail Top-Up Loan?

Since the top-up loan is in addition to the existing loan, they are mostly given by lending institution from which the borrower has already borrowed earlier. However, one must know that not all banks offer top-up facility. One can take top-up loan only from those banks that offer this facility. Moreover, some NBFCs may require the student to fulfill certain conditions before giving a ‘Top-Up’. Those conditions may include the student needing a GRE score of above 335.

As per the information available with Student Cover, the maximum unsecured loan that Indian NBFCs offer to students including ‘Top-Up’ is capped at Rs. 50 Lakhs. So, if a student who already has a sanctioned amount of Rs. 45 Lakhs, he or she can get a ‘Top-Up’ of only Rs. 5 Lakhs.

What is the interest rate on Top-Up loans?

The interest rate charged on Top-Up loans is more than that charged on the normal loan. Besides that, unlike the regular loan, Top-Up loans may not necessarily have a gestation period i.e. the time gap period between borrowing and repayment. The borrower, despite taking a fresh loan in the form of Top-Up loan may have to start paying increased Equated Monthly Installments or EMI (due to additional borrowing) as per the previously decided repayment schedule of the loan.

What additional paperwork needs to be done for Top-Up Loan?

If the borrower is seeking Top-Up loan from the same lender i.e. Bank or NBFC, he/she may not have to provide any additional documents to secure the Top-Up loan as that has been already done at the time to taking the loan. However, there are certain conditions that have to be met for getting additional loan. If the loan sanctioned earlier was a secured loan taken against collateral, the bank may re-evaluate the value of the collateral to check the additional amount can be lent to the borrower. If the value of the collateral falls short, the bank may ask the borrower to keep additional collateral to avail the top-up facility. In case of unsecured loan, the bank re-evaluates the borrower’s creditworthiness, credit history etc. to decide on the top-up loan eligibility.

Should one take Top-Up loan from the same lender?

This depends on the interest rate at which the lending institution is providing the top-up loan. If a different lender offers top-up at a lower rate of interest, then it is better to take it from that lender. However, it is advised that instead of just taking top-up loan from a different lender, the borrower should transfer his balance from the previous lender to the new lender and take the top-up loan. This way, the borrower would be able to repay the previous loan and get fresh loan at a lower interest rate. That will help the borrower to lower his or her EMI as the rate charged by the new lender for the balance and top-up would be lower.

Let’s Wrap Up!

Top-Up Education Loan is an additional loan that a borrower takes to meet the financing requirements. This is taken in addition to the existing loan and is usually charged at a rate higher than the normal loan. While many banks provide top-up option to the borrowers, others don’t. If a borrower gets a top-up option from a different lender at a lower interest rate, it is better for the borrower to transfer the balance from the previous loan to the new lender first and then take the top-up loan. That way, the borrower would be able to lower the EMI as the balance as well as the top-up will then be charged at a lower interest rate.

Disclaimer: The content of this blog is based on personal research of the writer. Readers’ discretion is advised. Neither Student Cover nor the writer will be held responsible for any wrongful interpretation of the content of this blog.