With the increasing property prices, home loans have become a popular financing option, and hence several banks and Non-Banking Financial Companies (NBFCs) offer home loans at attractive terms and conditions. However, many individuals often find it difficult to decide whether they should avail a home loan from a bank or an NBFC. Both banks and NBFCs have their own pros and cons. Ahead, we have elaborated on certain parameters to analyse which one of thesecould prove to be a better option for availing a home loan.
Home loans: Banks vs. NBFCs
- Rate of interest
For banks, the interest rate on home loan is directly linked to the Marginal Cost of Funds-Based Lending Rate (MCLR), which is regulated by Reserve Bank of India (RBI). Since home loan interest rates are linked to an external benchmark, banks are more transparent in passing on the benefit of rate reductionto borrowers.
On the contrary, home loans by NBFCs are not linked to MCLR. Instead, they are linked to the Prime Lending Rate (PLR), which is outside the purview of RBI.
- Importance of credit score
If you have a low credit score, availing a home loan with a bank can be extremely difficult. This is because banks conduct a thorough evaluation of your credit history, repayment capacity, etc., before sanctioning theloan. A good credit score of 750 or above can help you avail a home loan easilyat a competitive interest rate.
NBFCs tend to have comparatively more relaxed policies towards applicants with low credit score. However, with a low credit score, you will have to bear a higher home loan interest rate. To avoid this, you must try boosting your credit score before applying for a home loan. You can improve your credit score by clearing your existing debt and decreasing your credit utilization ratio.
- Processing time
Both banks and NBFCs perform verifications and background checks of applicants before approving their home loan application. Applicants are required to submit documents such as income proof, address proof, bank statements, identity proof, etc. Nowadays, because of digitization, most banks and NBFCs offer an online application process, thereby making it convenient for borrowers to apply for a home loan.
When applying for a home loan, you can easily scan and upload the required documents without any inconvenience. This will reduce the overall processing time, and help you arrange funds for purchasing your dream house instantly.
With leading banks and NBFCs, you can avail a loan amount of up to 75-80% of the property’s value. However, if you have surplus funds, you must consider making a larger down payment and borrowing a lesser amount as it will help you reduce repayment burden and get the loan at a lower rate of interest.
Irrespective of whether you avail a home loan with a bank or an NBFC, you must read the terms and conditions of the loan agreement carefully toavoid any inconveniences later.