Loan Top-Up (Loan Refinancing) Vrs New Loan (Multiple Loans)

Four (4) main factors to compare top-up loans with multiple loans.

Loans are inevitable. Whether it is an interest-free loan from family and friends or a loan with interest, it is need that drives it.

However, at the point of need for loans, so many questions come up for answering. One of such questions is whether the individual must refinance his or her existing loan (loan top-up) or whether he or she should opt for a new loan altogether to add to an existing loan to become multiple loans running concurrently.

There are pros and cons to any decision like making a choice between these two options. Mostly, the preferred option will be based on an individual’s personal situation and/or based on all other factors.

The pros and cons of the decision between a top-up loan and multiple loans are discussed around four (4) main factors that would influence the decision-making. Individuals will be better off taking their decision based on the following comparisms.

1. Interest rates being charged: though everyone would conduct some level of window shopping about the rate of interest charged on loans before applying, it is not uncommon for people to find out later about a cheaper loan being offered by another institution. Even when the existing loan was acquired at the best interest rate at the time the existing loan was accessed, change in trends could make the existing institution offer higher interest than other institutions. The two scenarios will favour a second loan from another institution instead of accessing a top-up loan from the existing institution.

2. Penalties on early settlement: loan top-ups or refinance provide higher loan amounts to an individual. However, part of it is used to pay-off the existing loan. The question the customer should ask his or her bankers is whether a penalty would be paid on the pay-off amount, since it is not all financial institutions which would charge a penalty on such a type of loan pay-off. The best way to identify whether such a rip-off will take place is for the individual to first enquire about the loan settlement amount to pay a few days before the application or enquiries about refinancing the loan. If the loan settlement amount is the same as the amount to be deducted from the top-up loan, then the individual must know he or she is being charged settlement penalty fees as well. In this case, accessing a new loan will be the better option.

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3. Insurance premium on loans: most loans are insured and the premium of the loan is either factored into the monthly deductions or is deducted upfront. Similar to the workings of loan settlement charges in the case of loan top-ups, insurance premiums on loans could be charged on the entire loan amount applied for or the insurance premium charged on only the amount difference to be received, since the original loan amount was already charged the insurance premium. A loan facility that requires an insurance premium on the entire loan amount during a loan top-up application will not be the best option.

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4. Locking up of affordability: loans, as mentioned earlier, are inevitable and people have to consciously create room for them, especially in any emergency. Accessing a top-up loan means an individual will combine his or her new affordability with the affordability that was used to access the previous loan to be able to take a higher amount of loans. The implication is that people will lock all their affordability in to one for a longer period and such an individual will not have any affordability amount to access a loan in case of any emergency. Locking up all affordability for longer periods only makes people vulnerable financially. Individuals can structure their multiple loans to release their affordability annually or biennially or at worse every three (3) years.

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