Since the year 2015, in the lending sector, NBFCs (non-banking financial companies) have been contributing massively toward credit growth. In fact, as per CRISIL data, NBFCs AUM is set to enhance 8 to 10 percent by FY 23 against 6 – 8 percent in FY 22 and only 2 percent in FY 21. As the NBFCs continue to grow their turf, many would want to understand whether to opt for NBFCs or banks when it is about availing of home loans.
The distinction between banks and HFCs
The major distinction between HFCs like LIC Home Loan, Repco, Bajaj Finserv etc. and banks like SBI, Bank of India, Bank of Baroda etc., is the method of computing the interest rate. Banks must follow Reserve Bank of India (RBI) norms while computing the rate of interest as they adopt the repo rate linked lending rate. On the contrary, HFCs link the rate of interest to PLR (prime lending rate). Banks are not permitted to lend at an interest rate below the repo rate. However, there are zero such norms for the PLR associated loans. Thus, HFCs can fix their PLRs. It permits adequate freedom to the HFCs as they independently take the decision on home loan rates. However, it can lead to more time for the impacts of rate cuts to reach the loan borrowers.
Here is a comparative analysis between banks and HFCs –
Rate of interest
The rate of interest offered by the banks is linked to the repo. This simply means the rate of interest provided by banks is directly linked with external benchmarks, and banks should respond to changes in repo rate by decreasing or increasing their rate of interest. On the contrary, HFCs do not fall per the RBI’s purview. NBFCs follow PLR (prime lending rate) to decide the rate of interest. However, if you hold a strong credit score and history, you can simply negotiate with the lender to avail home loan at a lower rate of interest. A home loan is generally availed for a longer repayment duration and may stretch up to repayment tenures of 20 to 30 years.
HFCs focus on convenience and have a more comfortable consumer experience. On the contrary, dealing with banks can be a great hassle, particularly for businessmen and busy professionals who do not have much time. HFCs score high on the grounds of convenience. For example, LIC home loan offers competitive rates with doorstep services, instant processing time and easy eligibility criteria. Such parameters simplify your thorough lending experience and assist in meeting your home funding needs without hassle.
Banks have higher stringent eligibility parameters and consider various more factors for granting home loans than NBFCs. Thus, a home loan from a bank can be availed just if all documents are in the right order and the home is in a recognized and established area. For example, a lower score and few problems with home location might not get you any loan with the bank. However, you can avail loan from NBFC at a higher rate of interest.
HFCs come with more relaxed policies than banks. This not just comes in handy when availing loan approvals but even during long repayment tenure. For example, you can omit lengthy documentation processes when it is about dealing with HFCs. Many of the HFCs, including LIC home loans, permit you to place an online loan application and provide you with doorstep service. Thus, it is more convenient for anyone to deal with HFCs than banks when it is to home loans. Ensure that you use the home loan EMI calculator to compute the EMI as per your repayment capacity. For instance, if you avail LIC home loan, ensure to use the LIC Home Loan EMI Calculator to figure out your EMI constituent as per your repayment potential and suitability.
Processing time availed by banks for disbursing the home loan usually is way longer than HFCs. With HFCs, you can get disbursement in 72 hours on an online application than banks, where it can take nearly a few weeks for the loan disbursement. In case you have shortlisted your dream house, you would not want to wait for a few weeks or months for the loan sanction from the bank. Hence, it is way better to directly connect with HFCs that can assist you in financing your home funding requirement faster.
However, before selecting any one of the lenders, ensure a factor in certain parameters like interest rate, processing fees, repayment tenure etc. Make the most of the lower rates, easy loan application procedure and convenience of quick disbursals and approvals.
FAQs (frequently asked questions) – Banks vs HFCs
Which home loan is a better option – HFC or bank?
Banks fall under the Reserve Bank of India (RBI) regulations and thus provide interest rates according to the repo rate. HFCs, on the other hand, do not fall under RBI’s purview, and the rates are dependent upon PLR or prime lending rate. Banks pass the benefits of rate reduction instantly to consumers, while HFCs usually do not.
Why are banks better as compared to HFCs?
HFCs attract heavy rates and involve other fees. Banks, however, offer low rates of interest and comparatively lower fees. Also, banks offer overdraft facilities and cut down on the rate of interest instantly as per the repo rate. Thus, banks are way better than HFCs when it comes to home loans.
Are HFCs safe?
HFC deposits often are riskier as compared to banks, and you must review the financials or ratings of HFC before opting for it.
What is the distinction between HFCs and banks?
HFCs are like banks as they lend and make investments. However, banks fall under RBI’s purview while HFCs do not. All banks use RBI’s repo rate, while HFCs use PLR (prime lending rate) for deciding the loan rates.
Is it a good move to approach HFCs for home loans?
HFCs hold flexible policies, but the rate of interest is higher. Though bank loans are associated with external benchmarks, HFCs are linked with PLR or prime lending rate. HFCs hold the right to fix the PLR (prime lending rate), and this permits you higher freedom in determining rates according to customers’ demand.