What is Top Up Loan and How Does It Work in Kenya? 

Njeri is a 33-year-old entrepreneur based in Nairobi, Kenya. She runs her own boutique, and one year ago, she took a loan from her Sacco to expand her business, and she's still repaying it. Her business has been doing well, and she hasn't missed a single monthly repayment.

In November 2023, a sudden opportunity arose for her to expand her business further. A stall next to her shop was closing, and the owner was selling it at a reasonable price. Njeri didn't want to pass up on the stall as a competitor could take up that space. But she didn't have enough money to buy it and already had a Sacco loan.

How could she raise the additional funds? In a dilemma, Njeri approached her Sacco and asked for a new loan. Her loan officer presented two choices: applying for a new loan or a top-up loan. Intrigued by the promise of speed and convenience, Njeri chose the latter.

Do you have an existing loan like Njeri and need additional funds? Top-up loans might be one of the options on the table. This article will explore everything you need to know about them.

Read Also: How Do I Decide Whether to Take a Loan or Not?

What is a Top-Up Loan? 

A top-up loan provides a quick way to secure additional funds, bypassing the lengthy process of applying for a new loan. There will be minimal friction as you already have an existing relationship with the lender. Typically, a top-up loan is given by the lender that issued the original loan.

However, securing a top-up loan isn't a given simply because you have an existing loan. It requires a solid repayment history with no missed payments, borrowing within your credit limits, and you will need to demonstrate your ability to meet financial obligations. 

That's not all. Eligibility also depends on the age of the loan. Some lenders will only avail you a top-up loan after a certain period (e.g., six months) since the original loan disbursement date. Your top-up loan will also consider your current credit score and outstanding debts with other lenders. 

When Should You Take a Top-Up Loan? 

Taking a top-up loan can be a strategic financial move in several situations, including:

When you require additional funds urgently - The existing relationship with the lender and streamlined procedures for existing customers can expedite the loan disbursement process.

When you want to minimise loan-related costs - The fees associated with applying for a top-up loan are often lower than those for initiating a new loan, making it a cost-effective option.

When you want to avoid prepayment penalties - Closing one loan account to open another to raise additional funds, such as with buy-off loans or refinancing with a new lender, can attract prepayment penalties. Top-up loans typically do not attract this penalty.  

When you need a relatively small additional amount, that doesn't warrant the complexities of a new loan application. 

When you are satisfied with the terms of your existing loan - Top-up loans may come with unchanged interest rates, loan terms, etc., and lenders may maintain these terms for existing customers with a good credit history. 

Should You Take a Top-Up Loan?

The Benefits of a Top-Up Loan

1. Hassle-Free Application Procedure - The relationship you have already built with the lender reduces the administrative burden on both of you, and this ensures convenience, Quick Processing Time, and Faster Loan Disbursement
2. Low-Borrowing Costs - Unlike new loans, top-ups typically involve low or no additional processing fees.
3. Easy-to-Meet Eligibility Criteria: Top-up loans usually come with more accessible requirements compared to new loan applications. Typically, any borrower with an ongoing loan who has made the required number of monthly repayments may be eligible for top-up loans.
4. Multi-purpose Use - Borrowers may be free to use the funds without restrictions. For example, you can take a top-up loan on your personal loan to fix your car or pay for your kids' school fees. 

The Drawbacks of Top-Up Loans

1. Limited Accessibility: Top-up loans are only offered to existing customers and can only be availed by the lender who gave the primary loan.
2. Fixed-Principal Amount: The maximum amount you can borrow will depend on your outstanding balance. Some lenders may not approve a top-up loan that will take your new balance beyond the original borrowed amount. 
3. Increased Monthly Repayment: If your lender approves a new top-up loan without modifying the term of your original loan, your monthly repayments go up. 

Read Also: 8 Things You Must Not Overlook While Applying for a Loan

When is A New Loan Better Than a Top-up Loan? 

Top-up loans can come in handy in multiple scenarios, as discussed above, but there are times when you might also have to consider applying for a fresh loan instead. 

First, if you have a higher funding requirement and the amount you need exceeds the credit limit of a top-up loan, you can consider a new loan. You can apply for a new loan from your current lender or approach a new one. 

Second, if other lenders are offering more competitive interest rates than your existing lender, exploring new loan options could be financially advantageous. Shopping around for the best interest rates is crucial in securing a loan with lower overall costs. 

Third, there are other alternative loans with better terms. For instance, if other facilities offered by your lender (or another lender), such as refinancing, buy-off loans, or debt consolidation loans, come with favourable repayment tenure or other terms that better suit your needs. 

Things To Consider When Taking A Personal Loan Top-Up

Different Lenders: Top-up loans allow you to borrow more from your current lender without opening a new loan account. However, that doesn't necessarily mean your lender is offering the best loan in terms of cost. Before taking a top-up loan, consider shopping around and comparing offers from different lenders. 

Loan Tenure: Often, the loan tenure of a top-up loan remains the same as the existing loan tenure. For example, suppose your current loan has a term of 5 years, and you opt for a top-up loan after three years of availing of the original loan. In that case, you will have to pay the remaining amount of your loan plus the top-up amount within the personal loan tenure, i.e., in two years. 

Your Income: Since a top-up loan typically does not let you change the loan terms, your monthly repayments will increase, which means more of your income will go towards repaying the debt. Consider how this will affect your budget, savings, and other aspects of your finances. 

Other Loan Options: You should consider looking at different types of loans, especially if you are looking for new loan terms. Applying for a fresh loan allows you to negotiate friendlier terms and possibly low interest rates. 

Reason for Borrowing: Evaluate the purpose of taking the top-up loan and ask if a top-up loan best suits your requirements. For instance, taking a top-up loan on your business loan and funnelling the money to non-business-related expenses might not be ideal. 

Read Also: How to Avoid Regret After Taking Out a Loan

WRAPPING UP 

While top-up Loans can be a lifesaver during unforeseen circumstances, responsible borrowing is paramount. It's essential to balance leveraging credit for necessities and avoiding excessive debt accumulation. 

Be mindful of your financial commitments and have a well-thought-out repayment strategy to ensure easy access to credit doesn't become a burden in the long run. This will help you maintain a healthy and sustainable financial profile.