NBFC vs Bank - which is ideal for home loans?

Introduction:

Typically, borrowers approach banks for home loans for lower interest rates governed by external market standards. This way, you as a borrower have more control over your loan in terms of knowledge of the changing interest rates linked to an external market. On the other hand, NBFCs have internal benchmarks governing interest rates that are usually high and not tied to external market standards. But NBFCs are more flexible in offering the home loan in the first place compared to banks that have strict eligibility criteria. An individual with a lower credit score has more chances of getting a home loan from an NBFC than a bank. So, besides interest rates, other factors also determine which lender will suit you the best.

Difference between NBFCs and banks:

• Interest rates: Banks can offer home loans at interest rates as low as 7%. However, this rate may change in future depending on market variations. But you can know of this change beforehand and plan accordingly. RBI has mandated banks to link their floating interest rates to an external benchmark.
  NBFCs, on the other hand, are linked to internal benchmarks called the prime lending rate (PLR). This interest rate is determined on a case by case basis, depending on your creditworthiness. The higher is the risk of default, the higher will be your PLR.
• Stamp duty and registration costs: Bank loans do not include these charges, whereas NBFCs do as part of the overall property valuation. As a result, you can borrow a more significant amount from an NBFC than from a bank.
• Eligibility criteria: Banks give loans based on your credit history. If your credit score is low, getting a loan is also common. In that way, the eligibility criteria for banks are stringent. NBFCs, on the other hand, may give you that loan by using another model of assessing your creditworthiness (PLR). But in that case, your interest rate will get higher.
• Loan sanctioning process: Banks, especially public sector banks, usually will take time to perform a thorough background check before approving your loan, thereby increasing the processing time and disbursal. NBFCs are faster as they run a relatively efficient operation.
• Renowned NBFCs can sanction your loan in as little as 72 hours.

Additional Read: Enhance your home loan eligibility

Bank vs NBFC: In a nutshell

If a lower interest rate is your prime concern, opt for a bank home loan. That is especially valid when you are confident of your high credit score. But with a high credit score, you can also negotiate the terms of your home loan, including the interest rate. This flexibility is possible with NBFCs as their regulations are not governed by the RBI but internally on an individual basis. Additionally, NBFCs have far lesser processing time.
A home loan from a bank with a low credit score can be a distant possibility. But that does not mean you have to give up on building your dream house. If your current income allows you to bear higher interest rates, NBFCs can come to resurrect your dream. You can always transfer your loan to a bank later if you want.

Additional Read: Home Loan vs Loan Against Property

Conclusion:

Interest rates are not the only determining factor for applying for a home loan. The loaning institution itself also matters. While lower interest rates offered by banks could be most appealing, compare other factors based on your credit history, urgency, and financial goals. And each repayment is an opportunity to enhance your credit score. If you have opted for NBFCs for your home loan now, you always have the chance to return to banks if that’s where your financial moorings are.