Thinking of Taking a Top-up Education Loan? Here's Everything You Need to Know

Investing in education is crucial for career development and leading a successful life, but the rising costs of education in India and abroad have made it expensive. While there are options like tapping into your savings and selling assets, if one wishes to maintain their standard of living and take pride in their life choices, then obtaining an education loan is the best option available.

Nevertheless, taking an education loan for higher education necessitates careful planning. The borrower must not only estimate the exact cost of tuition but also make an informed guess about other expenditures, such as living expenses. However, unforeseen factors like fluctuations in currency rates or tuition hikes may necessitate the student to opt for a top-up education loan from the bank to cover the shortfall.

What Is Top-up Education Loan?

A top-up education loan is an additional amount provided by the lending institution to the borrower, in addition to their existing loan, typically for financing higher education abroad. The amount sanctioned by the lender depends on various factors, such as collateral value in the case of a secured loan, academic profile, creditworthiness, income sources, and job prospects for an unsecured loan. Disbursement of funds occurs as needed from the sanctioned amount, and a top-up loan may be granted after re-evaluation of these factors. In the case of a secured loan, the top-up loan may be based on the same or different collateral.

If you have already availed an education loan from a particular bank or an NBFC, you can apply for a top-up loan from the same lender. It is a convenient option for the lender as well as for you - the borrower, as the lender already has your personal and financial details, which makes the loan approval process quick and smooth. However, the amount of top-up loans that can be sanctioned also depends on your maximum loan eligibility. The lender will also consider any outstanding amount you may have as a borrower.

How Does a Top-up Loan Work?

Suppose Rhea is eligible for an education loan of Rs 75 lakhs, but she only opts for a loan of Rs 50 lakhs initially. After a few months, Rhea needs additional funds to cover some unexpected expenses related to her education. Since she has already availed of a loan of Rs 50 lakhs, she is still eligible for an additional loan amount of Rs 25 lakhs (i.e., the difference between the eligible loan amount of Rs 75 lakhs and the availed loan amount of Rs 50 lakhs).

Let's say that after availing of the initial loan of Rs 50 lakhs, Rhea repaid Rs 10 lakhs, and the outstanding balance on loan is Rs 40 lakhs. In this scenario, her total eligibility for an additional loan will be Rs 35 lakhs (i.e., the difference between the eligible loan amount of Rs 75 lakhs and the outstanding balance on the loan of Rs 40 lakhs). So Rhea can opt for a top-up loan of up to Rs 35 lakhs to cover her additional expenses related to education.

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How Do You Get a Top-up Education Loan?

A top-up loan is typically offered by the same lending institution from which the borrower has previously borrowed. However, not all banks provide this facility, so one must check with their bank first. Some banks and NBFCs may require the student to meet certain conditions before granting a top-up loan, such as achieving a GRE score above a certain level.

It is advisable to explore borrowing options besides your own bank when availing of a top-up loan, such as other banks, NBFCs, and education financing companies, to potentially secure a better interest rate. If your current bank denies your request for additional funding, you could also consider transferring your existing loan to a new lender rather than taking out a new loan. However, take note that not all banks offer top-up loans, and the approval of a top-up loan is subject to each bank's policies.

What Is the Top-up Education Loan Interest Rate?

The interest rate for top-up loans is typically higher than the interest rate of regular loans. Besides, unlike regular education loans, these loans may not have a gestation period, which is the time gap between borrowing and repayment. So, the borrower will have to start paying increased EMIs, even though they have taken a fresh loan in the form of a top-up loan, as per the previously decided repayment schedule of the loan.

The interest rate for the top-up loan may be either fixed or floating and can vary across the banks or NBFCs. Various factors are considered by the lender when determining the interest rate for the loan, such as the loan amount, loan tenure, market conditions, the student's academic record and experience, and the educational institute. Additionally, the borrower's creditworthiness may also be a factor in the interest rate charged. In some cases, the lender may require the borrower to provide additional collateral.

Do You Need to Submit Additional Documents?

To avail of a top-up loan from the existing lending institution, you may not need to provide any additional documentation since the lender already has your personal and financial details. However, you must fulfil certain criteria to qualify for the top-up.

If the existing loan was availed against collateral, the lender might reassess the value of the collateral to determine if an extra loan amount can be provided. If it is insufficient, the lender may ask you to submit additional collateral to qualify for the top-up loan. Whereas, for unsecured loans, the lender may re-evaluate your creditworthiness and other factors to determine your eligibility for a top-up loan.

Should You Take a Top-up Loan From the Existing Lender Or a New Lender?

Whether to avail of a top-up education loan from an existing lender or switch to another lender depends on the interest rate offered. If you are getting a top-up loan from a different lender at a lower interest rate, it makes sense to go with that lender. It is advisable to instead of just taking a top-up loan from the new lender, you should also transfer the outstanding existing loan balance to the new lender. This will help you clear the existing loan and get a new loan at a lower interest rate, which will ultimately reduce your total interest outgo.

To conclude:

The Top-up Education Loan is an additional loan that a student takes to fulfil their financing needs in addition to their current loan. Generally, it comes with a higher interest rate than a regular loan. If you are offered a top-up option from a different lender at a lower interest rate, it is advisable to transfer the balance from your existing loan to the new lender first and then take the top-up loan. This way, you can reduce your EMI since both the balance and the top-up will be charged at a lower interest rate.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.