Are you one of those looking to place an application for a home loan and witnessing the same dilemma that many usually face? If you are facing a tough time selecting between the right bank and NBFC to get a home loan, here in this blog, you will learn how to make the correct decision. While banks are a traditional option to apply for home loans through lenders like Yes Bank home loan, Indiabulls home loan, and other home loan lenders, it is crucial for you to understand the distinction between an NBFC and a bank. This is because when a bank fails to provide you with a home loan or turns down your application for a home loan, an NBFC may welcome you with open arms owing to its lenient regulations than banks.
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The top NBFCs and banks in India to place an application for a home loan are –
| NBFCs | Banks |
| LIC Housing Finance | Axis Bank |
| DMI Housing Finance | Canara Bank |
| Hinduja Housing Finance | Citi Bank |
| Reliance Home Finance | HDFC Bank |
| L & T Housing Finance | State Bank of India |
| Godrej Housing Finance | Punjab National Bank |
| PNB Housing Finance | Bank of Baroda |
| IIFL Home Loan | Kotak Mahindra Bank |
| Tata Capital Housing Finance | Union Bank of India |
Both NBFCs and banks come with the same motive to provide you with a loan, yet both often are extremely distinct from one another. The major distinction between NBFCs and banks is –
∙ NBFCs are registered under the Companies Act, of 1956 and the banks are registered as per the Reserve Bank of India Banking Act, of 1956.
∙, Unlike NBFCs, the lenders of the banks are permitted to accept as well as lend deposits.
∙ It is a must for the banks to maintain a CRR (cash reserve ratio) with the Reserve Bank of India (RBI). However, it is not a mandatory thing for the NBFCs.
Let’s know here in detail the major difference between NBFCs and banks – Comparative analysis of home loans between banks and NBFCs
| Differentiators | Home loans from NBFCs | Home loans from banks |
| Service | You can place an application for a home loan from NBFC but cannot have the deposits or create any savings account like banks.
| Apart from applying for a home loan with a bank, you even can have deposits and accounts like fixed deposits, savings accounts, current accounts, recurring deposits, etc. |
| Cash reserve ratio (CRR) | NBFCs are not needed to maintain CRR with either the Reserve Bank of India (RBI) or another institution. Home loan is maintained from the capital of NBFCs and hence there is zero interference from the Reserve Bank of India. | Banks require to maintain CRR (cash reserve ratio) with the Reserve Bank of India. In the case, a bank requires a home loan in excess, it will have to enhance the cash reserve ratio with the Reserve Bank of India. Also, all the banks are monitored by the Reserve Bank of India when they are lending a loan to you i.e., the customer.
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| Rate of interest | The NBFCs’ interest rate is determined by the NBFC. However, the rate of interest is impacted by the existing interest rates in the market.
The interest rate offered by NBFCs is generally higher than that of banks. | Banks’ rates are regulated by the Reserve Bank of India (RBI) and are linked directly to the repo rate of RBI. Thus, the rates fluctuate when the Reserve Bank of India decreases or increases the repo rate.
Also, the rates offered by the banks are lower than NBFCs |
| Repayment tenure | The repayment tenure offered by NBFC on a home loan is often flexible and goes as high as 20-25 years. | Banks provide a higher repayment tenure that is flexible and may go as high as 30 years. |
| Credit score | NBFCs might still provide you with a home loan if you hold a poor credit score of below 650 by offering a higher rate of interest. | Banks may turn down your application for a home loan if you do not have a good credit score equaling 750 and above. |
| Terms and conditions | The terms and conditions of NBFCs are flexible and relaxed. | The terms and conditions of the bank lenders are stringent. |
| Documentation | NBFCs documentation procedure is more lenient than a bank. Self-employed individuals who do not hold any salary proof find it simpler to apply for a home loan through NBFCs. | Bank lenders are more stringent with documentation procedure that is generally lengthy. |
| Processing time | NBFCs generally process the home loan within 72 hours. | The processing time of the home loan is more in the case of banks than NBFCs. |
Discussed here are both the benefits and drawbacks of availing a home loan from both NBFCs and banks.
Benefits of availing a home loan from bank lenders –
Major benefits are –
Rate of interest is regulated by the Reserve Bank of India – All banks follow a Repo rate model that is regulated directly by the Reserve Bank of India. Also, the Reserve Bank of India (RBI) has made it compulsory for all banks to link home loans to the repo rate.
Attractive rate of interest –
If you hold a low credit score, you cannot get a home loan from a bank. However, if you hold a strong score of 750 and above, you can get a home loan at an attractive rate of interest starting from 7 per cent.
The bank offer an overdraft option –
An overdraft option is a type of credit offered to you as an individual by the bank. This permits you as a home loan borrower to deposit an amount over the loan proceeds and withdraw the fund whenever needed. Bank opens a specific account for you with the overdraft credit limit and permits you to pay off your home loan by depositing the same into your overdraft account. If you make any additional deposit, it may be considered as a home loan prepayment and assists to lower the rate of interest and amount.
Loan proceeds –
You can opt for a home loan proceeds of as high as 90 per cent of the value of the property from the bank.
What are the drawbacks of availing a home loan from bank?
Drawbacks –
Complicated documentation procedure
Banks follow a stringent and lengthy documentation procedure. Thus, it takes quite a lot of time for the disbursal of your home loan.
A healthy credit score required
If you hold a low score of below 750, then banks may hesitate to approve your application for a home loan.