Buying your first home can be an emotional and exciting experience in equal measure. A vital part of the journey is not to get overwhelmed and bogged down by the process. For most of us, we need to avail a loan to fund our impending house purchase. In most cases, loans can be procured from either a bank or Non-Banking Housing Finance Company (NBFC). Making the final decision whether to borrow from a bank or NBFC is easier said than done.
There are several factors which must be considered before taking the plunge.
Key factors which need to be analyzed include the home loan repayment period, processing fees, interest rate applicable as well as other fees such as pre-payment, foreclosure, and late payment charges amongst others.
It needs to be mentioned that both banks, as well as NBFCs, are required to follow a different set of lending guidelines. HFCs are specialized NBFCs regulated by the National Housing Bank (NHB) and therefore have to disburse Housing Loans as per the NHB’s guidelines. Banks, on the other hands, are regulated by the Reserve Bank of India (RBI) and Home Loans disbursed by them are guided as per parameters set by the RBI.
Any day, long-standing banking players like PNB & Standard Chartered Bank Home Loan are stable options you can surely consider at the time of availing a housing loan. Listed below are some distinct differences which could further help you narrow down on the best alternative to suit your circumstances.
One of the key differences between an NBFC/ HFC and a bank is the method in which the rate of interest is calculated. Banks are mandated by the RBI to offer all new Home Loans by following the Marginal Cost of Lending Rate (MCLR). This interest rate regime, which came into force after April 2016, made it mandatory for all banks to link Home Loans to the marginal cost of their borrowing – across tenures.
What this means for you– the customer, is that in case there are intervals where there will be an increase/ decrease in interest rate. The terms will be explicitly mentioned beforehand. This foresight allows you to be fully aware of any interest rate hike or drops by the RBI without any last-minute surprises. Furthermore, at the time of your Housing Loan getting approved, the reset date will be communicated by the bank to you which will stay in force until the next reset date arrives– which could be within 6 months or a year.
Housing Loans sanctioned by HFCs and NBFCs such as PNB Housing Finance Home Loan, on the other hand, aren’t linked to MCLR but are instead, connected to the prime lending rate (PLR). While banks aren’t allowed to sanction loans at rates below the MCLR, PLR-linked loans provided by NBFCs have no such restrictions and are free to set their own PLR-rate.
In other words, greater freedom is allocated to NBFCs to either increase or decrease their loan rates as per their convenience and selling requirements. However, this also means that you as a customer will take longer to enjoy the benefits of interest-rate cuts as NBFCs are generally slower to pass on the interest rate cuts as they base their lending rates against the benchmark prime lending rate or BPLR. While this might work in favour of a certain set of customers who are unable to meet the loan eligibility criteria set by banks, for others who easily fulfil all the requirements, they might have to pay higher interested rates vis-à-vis banks unnecessarily. Additionally, you might also not find the entire process as clear cut as taking out a housing loan from a bank and may never be aware if you have received the best possible interest rate either.
Loan Eligibility via Credit Score
In this day and age, credit scores such as CIBIL have grown in importance as it can help financial institutions gauge the credit-worthiness of their customers. While the usually acceptable benchmark by banks for getting a Home Loan approved is a score over 750. NBFCs, however, tend to be more on the lenient side and are comparatively less demanding. This is because, their higher interest rates or cost of borrowingvis-à-vis banks leaves them with little choice but to have relaxed policies and be less selective to loan applicants having lower credit scores as well.
Additionally, NBFCs have their own credit scoring models which they use in conjunction with scores provided by credit rating bureaus to capture a better and more comprehensive view of a customer’s creditworthiness.
That said, in case your credit score is severely dented, an NBFC will also charge you a higher rate than usual. Since credit scores change every quarter, you can look at improving your score, evaluate your options and then decide where to avail the Housing Loan from before making the final decision. This will also enable you to get a better rate of interest and disbursal amount. Thereon, it also needs to be mentioned that in case you don’t meet the credit criteria set by banks, you might be required to convert your Home Loan into a secured loan by way of mortgaging some asset. This is why it’s imperative that you make sure to weigh the pros and cons of each alternative carefully before arriving at a decision.
When applying for a Housing Loan, you need to understand that the loan will never be granted on the total acquisition price. The total acquisition price not only includes the selling price mentioned by the builder but also ancillary fees and costs such as stamp duty, registration, brokerage charges, furnishing & repairs costs, installation costs, etc. As such banks are only allowed to finance 80 percent of a property’s total acquisition price. The remaining 20 percent which might go towards these additional costs will have to be self-funded and can have a massive bearing on your final purchasing decision. While both banks and NBFCs aren’t permitted to fund stamp duty and registration costs, NBFCs tend to include these costs as part of the property’s market valuation thus allowing you to borrow a larger amount –depending on your eligibility. You should analyze your options by comparing associated charges and facilities provided by both banks as well as NBFCs.
Paperwork & Processing
Banks usually have a strict and inflexible paperwork process. However, owing to these stringent policies, banks can afford to pass on better interest rates to you. However, if you’re looking for quicker loan disbursement, then NBFCs are the way to go as they are usually quicker, more flexible and relaxed when it comes to processing loans. When it comes to other charges such as pre-payment, foreclosure and late payment charges, NBFCs tend to charge a lot higher vis-à-vis banks.
The bottom line
While NBFCs have a swifter and less stringent process of sanctioning Home Loans to borrowers, banks tend to come out trumps with lower interest rates and payment, foreclosure and late payment charges. Moreover, banks provide customers with an overdraft loan facility while NBFCs don’t. Eventually, whether you should choose an NBFC or a bank comes down entirely on your personal and financial circumstances.