With a 64% growth in NBFC loan distribution from April 2021 to March 2022, it is evident that most people have been relying on them for financial aid. They have disbursed approximately 12 crores of the total loan amount. However, studying NBFC vs bank for a home loan is crucial before finalising a lender. While the most decisive factor is the home loan rate of interest offered by financial institutions, consider the other factors that set banks and NBFCs apart.
How are NBFCs Different from Banks?
Loans have become more attainable to borrowers who meet the basic eligibility criteria– income, citizenship, and credit score. However, the major concern of a borrower is whether to approach a bank or an NBFC. Recently, RBI stated that NBFCs outperform banks in financial stability and increase customer satisfaction by 15%. Following are the key differences between NBFCs and banks:
|They fall under RBI-Banking Act 1956.||They are under the Companies Act 1956.|
|They accept demand deposits.||They cannot accept it.|
|Foreign investment is allowed in private sector banks but not more than 74%.||100% allowed.|
|They can draw a self-check on their own.||They cannot.|
|It accepts deposits for investment and lending purposes.||It is only for lending purposes.|
|They issue debit and credit cards.||They do not.|
|They provide transaction services.||They do not.|
Differences in Home Loan Rate of Interest
While the Reserve Bank of India regulates banks, NBFCs function under the Companies Act. This difference directly impacts the interest rate. Banks apply floating interest rates on home loans. These rates increase or decrease based on RBI policy changes. Contrastingly, RBI exercises no control over NBFCs’ interest rates. NBFCs are linked to internal benchmarks or PLR (Prime Lending Rate). You can negotiate with the lender for a higher amount on a nominal interest rate.
Banks offer home loans at interest rates as low as 7%. Although this rate can change depending on market variations, you can check the change beforehand and plan accordingly. With NBFCs, the interest rate depends on your creditworthiness. The more the risk of default, the higher the PLR.
Differences in the Terms’ Flexibility
NBFCs often offer more flexibility in home loans. Unlike banks, you can skip the lengthy application and paperwork. Renowned NBFCs grant you high amounts up to Rs. 5 Crore for a 30-year tenure within as little as 72 hours of application. You can apply online safely from the comfort of your home. However, the online application facility is also available with several banks.
Differences in Eligibility Criteria
Banks rely more on your credit history for sanctioning home loans. You are more likely to get a low amount with a low credit score. Thus, the eligibility criteria for banks are stringent. Contrastingly, NBFCs grant you that based on other models of assessing your creditworthiness (PLR), the interest rate will be higher for low credit scores.
Differences in Processing Time
Stamp duty and registration costs are waived off with bank loans, whereas NBFCs include them. Consequently, you can borrow more significant amounts from NBFCs than from banks.
Additionally, public sector banks take considerable time to perform a thorough background check before loan approval. They have a higher processing and disbursal time. NBFCs, on the other hand, are faster with their relatively efficient operation and can sanction your loan in as little as 72 hours.
Differences in Customer Services
The financial sector is a service-led industry that functions regularly to meet your requirements. However, NBFCs outperform banks in terms of dedicated customer service. They provide online facilities so that you can keep tabs on payments, charges, and other loan details. Moreover, a customer relationship manager handles home loan-related queries.
Following are some of the benefits of NBFC over banks:
- Faster home loan sanctioning process.
- More flexible terms.
- Promising features and perks for both existing and new borrowers.
- More promising customer service
Check out the advantages of banks over NBFCs:
- When a lower interest rate is your prime concern, choose a bank home loan.
- With a decent credit score, you can negotiate your home loan terms.
If you have a high credit score and are looking for a lower interest rate, opt for a bank home loan. The interest rate negotiation facility is also available with NBFCs. Additionally, they come with a far lesser processing time. Use the online home loan EMI calculator to calculate the monthly payments you will have to make with each financial institution. A home loan for building your dream house isn’t a distant possibility. If your current income favours higher interest rates, NBFCs can turn your dreams into reality. Remember, your present situation will decide on your loan partner, but you can always transfer your loan from an NBFC to a bank if you want.