Home Loans: Banks vs NBFCs – Which Is the Better Choice for You?

Posted On September 2, 2024

Looking for a home loan can be a bit of a headache, right?  Banks and NBFCs are all competing for your business, but who’s got your back?

Banks might lure you in with their lower interest rates and clear-cut rate changes tied to external benchmarks, but what about their tough eligibility criteria and slow processing times?

On the other hand, NBFCs may not always have rock-bottom rates, but they come through with flexibility, speedy approvals, and a more customer-friendly vibe. It’s not a cut-and-dried decision, for sure.

To make things easier for you, we have discussed the interest rates, eligibility criteria, and customer service to determine which lender suits your needs and style best.

Understanding the Basics

First, let’s break it down. Banks are closely regulated by the Reserve Bank of India (RBI) and have stricter lending criteria.

On the other hand, NBFCs (non-banking financial companies), who are also under the RBI’s oversight, operate with more flexibility, making them able to serve a wider customer base, including those who might not meet the bank’s rigid standards.

Banks prioritize maintaining a low-risk portfolio by following conservative lending practices, which means they typically only lend to individuals with a strong credit history and stable income. While this helps reduce risk for the bank, it can create obstacles for many potential borrowers.

NBFCs have a wider risk appetite. They focus on niche markets that banks might not serve, including individuals with non-traditional income sources, small business owners, or those with lower credit scores. This broader approach often makes NBFCs the preferred choice for those who may not meet the requirements for a bank loan.

Interest Rates: The Key Decider

Banks: The interest rate is a key consideration when selecting a home loan provider. Presently, banks are providing home loans at interest rates below 7%, which is quite competitive.

Part of the reason for this lower rate is the RBI’s directive for banks to link their floating retail loans to an external benchmark, like the repo rate.

This requirement ensures that adjustments in the RBI’s policy rates promptly impact the interest rates of bank loans, resulting in greater transparency and responsiveness to market conditions.

NFBCs: On the other hand, non-banking financial companies (NBFCs) have more flexibility in setting their interest rates, as they are linked to the Prime Lending Rate (PLR) rather than an external benchmark.

 While this allows NBFCs to offer more customized rates based on customer profiles, it also means that their rates might not decrease as swiftly as those of banks during a declining interest rate regime.

For borrowers, this could result in paying higher interest over the loan tenure.

Eligibility Criteria: Banks vs NBFCs

Banks: The eligibility criteria for obtaining a home loan is an essential factor to consider. Banks are known for their strict requirements, including a thorough review of the applicant’s credit history, income stability, and employment status.

Public sector banks are particularly strict, often leading to longer processing times.

While these measures aim to ensure that only creditworthy individuals receive loans, they can pose a significant challenge for those with irregular income or lower credit scores.

NBFCs: On the flip side, NBFCs have more lenient eligibility criteria. They are open to lending to individuals with lower credit scores or those who do not meet the strict requirements of banks.

This flexibility makes NBFCs a feasible choice for self-employed individuals, freelancers, or anyone with a non-traditional income source.

However, this flexibility comes with a downside—higher interest rates and potentially less favourable loan terms.

Loan Processing and Customer Service

Banks: When obtaining a home loan, the convenience and customer service offered by the lender are also crucial.

Banks are typically more bureaucratic, resulting in prolonged processing times and a rigid structure that can be exasperating for borrowers.

Nevertheless, they make up for this by providing more robust customer service systems, including 24/7 support and convenient access to loan-related information through online platforms.

NBFCs: NBFCs have responded to the evolving demands of customers by providing faster loan processing and more tailored customer service.

Numerous NBFCs offer digital solutions, simplifying the management of loans online, access to essential documents, and providing support when required.

This customer-focused approach can enhance the overall loan experience, making it more seamless and gratifying.

Flexibility in Loan Terms

Banks: Banks generally provide limited flexibility in loan terms, including the borrowing amount, tenure, and repayment options.

They adopt a more conservative approach, which may result in the exclusion of certain expenses such as stamp duty and registration costs from the loan coverage.

This limitation may pose a challenge for individuals seeking to finance all home-buying expenses through the loan.

NBFCs: On the other hand, NBFCs demonstrate more flexibility by frequently incorporating additional costs like stamp duty and registration fees into the property’s market valuation, enabling borrowers to obtain a larger loan amount.

This adaptability can be especially advantageous for first-time homebuyers in need of additional financial assistance.

Based on your unique financial profile and preferences, the decision between a traditional bank and a non-banking financial company (NBFC) for your home loan is important.

Banks typically offer lower interest rates and greater transparency, making them suitable for those seeking long-term savings and meeting specific eligibility criteria. Alternatively, NBFCs provide more flexibility, personalized services, and quicker processing, which can be beneficial for individuals seeking a tailored lending experience.

It’s important to carefully weigh your financial profile, tolerance for interest rate fluctuations, and the level of service you desire to make an informed decision that aligns with your goals and circumstances.

Save Max Real Estate Brokerage has partnered with leading banks including SBI, HDFC, Bajaj Finserv, and ICICI to offer seamless home loan solutions. Contact us today and let our dedicated team connect you with these partners, ensuring you receive the best possible solutions lower interest rates.