NBFC Vs Bank: Which Is Better For A Home Loan?

Discover the differences between NBFC and bank home loans. Learn about interest rates, eligibility, and make an informed decision for your home loan.

An NBFC or a non-banking financial company is a company that operates in the area of loans, chit funds, stocks, bonds

Source : Bajaj Finserv

Over the last few years, many NBFCs have come up on the horizon and built a strong customer base within only a short span. Before we answer the key question here and weigh out the pros and cons of NBFC home loans and bank home loans, let us first understand the difference between an NBFC and a bank.

What is an NBFC and How is it Different from a Bank?

An NBFC or a non-banking financial company is a company that operates in the area of loans, chit funds, stocks, bonds, hire-purchase insurance, etc. These companies are registered under the Companies Act, of 2013, and their working is regulated by the Central Bank of the country, i.e., the Reserve Bank of India under the RBI Act, 1934. There are many different types of NBFCs in India: asset finance companies, loan companies, investment companies, systematically important core investment companies and infrastructure finance companies are all different types of NBFCs.

So, what is the difference between an NBFC and a bank? Actually, there are many differences between the two. Here are some of them:

• Banks are regulated by the Reserve Bank of India under the Banking Regulations Act, 1949. On the other hand, NBFCs are incorporated and regulated by the central bank of the country under the Companies Act, of 1956.
• Another key difference between an NBFC and a bank is that while banks need a license from the Reserve Bank of India to operate, NBFCS operate without a license.
• Furthermore, while banks can create credit and issue demand drafts, NBFCs can do neither.
• Similarly, banks can accept deposit demand deposits but NBFCs cannot.
• Yet another NBFC and bank difference is that while banks are an integral part of the payment and settlement system, NBFCs are not a part of this system and do not play a role in it.
• Banks also provide transaction services which NBFCs don’t.

Let us now try and answer the key question here: Which is better an NBFC home loan or a bank loan? Read on to know the answer.

Differences Between NBFC and Banks for Home Loans

Reasons to Opt for a Bank Home Loan

As mentioned before, non-banking financial companies cannot accept demand deposits from customers and are not a part of a bank’s payment and settlement cycle. Thus, NBFCs do not have any deposits from customers. More importantly, NBFCs do not have access to low-cost funds from the Reserve Bank of India like banks do. In other words, banks can borrow money from the Reserve Bank of India at low bank rates and therefore, can offer home loans at a lower home loan interest rate than most NBFCs. Further, while both banks and NBFCs come under the regulatory purview of the Reserve Bank of India, banks must deal with much more stringent regulations from the central bank of the country. This leads to higher transparency in terms of both the loan processes as well as terms and conditions of a home loan and their implementation.

Unfortunately, all banks have very strict eligibility requirements for home loans, and borrowers who do not meet these requirements get their applications rejected immediately. Further, banks ask for a lot more documentation than NBFCs. This, in turn, can lead to the whole process of availing of a home loan becoming very stressful and hassling.

In conclusion, the low home loan interest rates that banks offer can prove to be certainly advantageous. However, that’s only when one gets approved for a loan in the first place, which is not always an easy task with banks.

Here's Why You Should Choose NBFC for Home Loan

While most NBFCs cannot compete with banks in terms of home loan interest rates, the growing popularity of many NBFCs has made it possible for these financial companies to offer home loan interest rates at par with banks, if not lower.  Further, non-banking financial companies are flexible with their eligibility and documentation requirements, which is not the case with banks. Thus, if you do not have the ideal credit or income profile, apply to an NBFC to get easily approved for a home loan. Lastly, until a few years ago, when it came to transparency in terms of loan terms and conditions and passing on the benefits related to rate cuts, banks won hands down. However, these days, most NBFCs also give borrowers the option to link their home loan to an external benchmark, such as the Repo Rate, as doing so helps maintain transparency in the entire process. Lastly, NBFCs are more serious about winning and retaining customers and therefore, work harder. Their service quality is generally better than that offered by banks.

In conclusion, until and unless a bank is offering you an interest rate that is much lower than the interest rate that any NBFC is offering you, it makes more sense to go with an NBFC home loan. 

Which is the Best NBFC in India?

If you are planning to apply for a home loan, there are many different NBFCs to choose from. If you have a good credit profile, you will be able to score a good deal with any NBFC that you apply to. Just remember to talk to at least a few different NBFCs and negotiate with each of them. Here are a few features and benefits that you must look out for.

Get the Best NBFC Loan: Key Pointers to Remember

Low Interest Rates

Home loan interest rates start from 8.45% per annum. Whichever NBFC you apply to, try and avail yourself of the lowest home loan interest rate possible. This will help you keep your loan EMIs affordable and minimize the total interest outgo on your loan.

Long Repayment Tenor

Home loans come with a long repayment tenor. While selecting your repayment tenor, try and strike a balance between affordable EMIs and your desire to become debt-free as quickly as possible. There are some NBFCs that give borrowers the option of choosing to repay their loan over a tenor of up to 40 years. Such a long repayment tenor helps borrowers repay their home loan slowly and easily, without feeling burdened at all.

External Benchmark-Linked Home Loans

These days, most NBFCs give home loan borrowers the option of linking their home loan to an external benchmark, such as the Repo Rate. With Repo Rate-linked home loans, borrowers experience much higher transparency with the entire loan process. So, choose to link your home loan to an external benchmark.

Simple Home Loan Eligibility Criteria

Pick up an NBFC that has very simple home loan eligibility criteria. Simple qualifying criteria make it quite easy for borrowers to get approved for a home loan, even if they do not have the ideal credit profile.

Approval and Disbursal

If you want to close your home deal as quickly as possible, choose an NBFC known for quick approval and disbursal.

Home Loan Balance Transfer Facility

Borrowers who think they are being charged an exorbitantly high home loan interest rate by their current lender or are unhappy with the services provided by them can transfer their home loan to another lender and also enjoy the option of availing of a top-up loan. Choose to go with an NBFC that allows borrowers to transfer their home loan to another lender if they wish.

Online Account Management

Pick an NBFC that allows you to manage your loan account, pay EMIs, raise complaints and queries, and do so much more while sitting within the comforts of your home through an online portal. This will make your life a lot simpler.

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