While looking for a loan, we run to a lot of lending institutions to fulfill our credit need. Apart from a personal help from an acquaintance, a loan seeker looks forward to either a known Bank or a Non-Banking Financial Company i.e. NBFC for help. None is less than the other. Both have their own types of customers. Both give lucrative offers to the wide variety of borrowers for their distinct needs. Hence it is on us to decide whom should we approach and what are the benefits.
So, let’s understand it here! For loan should we approach a bank or an NBFC? Which one is better and why? The decision can be made by looking at the below-given points –
Bank vs NBFC: Difference in constitution
There is a huge difference in the so called constitution of banks and NBFCs. While banks are integral part of our banking system and are regulated by the Reserve Bank of India, the NBFCs are nothing but financial companies whose business is to lend money to interested borrowers and earn by getting interest on that money. They are created under Companies Act of 1956.
While banks have all the rights to send or receive money hence making them a part of payment and settlement system, NBFCs are not allowed to accept deposits, issue drafts or cheques. This is a huge difference between both the types of financial institutions.
Let’s understand how different their lending procedure is!
You might be wondering how the constitutional difference of one financing organization from other can affect you as a borrower. The answer is – it hardly does! Both hold a trustworthy figure in the market, the flaw can be in specific type but then it has to do nothing with their constitution.
So, how to decide that whom should one approach for a loan? Are there any benefits of one over another? Read further to know this.
1. Rate of interest:
Banks and NBFCs primarily differ on the rate of interest that they offer on the loan amount. While banks work on MCLR which are linked to macroeconomics factors such as RBI-mandated lending rates; NBFCs and Housing Finance Corporations (HFCs) lend as per the Prime Lending Rate i.e. PLR which is not regulated by RBI. This means that a bank can never offer you a loan less than the MCLR however, an NBFC or an HFC can. They can increase or decrease the interest rate whenever they wish. This comes out as a benefit to customers too as in case of reduced interest rate they can buy luxury items easily. For example, interest-free car loans or no EMI consumer durables. On the other hand, in case they are not able to meet a bank’s loan eligibility criteria then they always have an option to reach out to NBFCs, who readily offer loan on high interest rate.
2. Credit scores criteria:
While banks prefer lending money to only those who have credit scores higher than 750, NBFCs do consider lending to those also who fall in the range of 550 to 700. For this, you can check your immediate credit scores by logging on to Creditseva. If you already have an account on CreditSeva, you can check your latest credit scores immediately.
If your scores are 750+, then there is no problem, you may approach either bank or NBFC. Both of them will give you loan on the lowest possible rate. Even if they don’t, at such good scores, you can always negotiate.
However, if your scores are less than 750, infact around 550 or so, then instead of getting out rightly rejected by a bank, it is better to approach to an NBFC. Infact, their procedures might be less tiresome too.
1. Approach towards loan eligibility:
In case of a home loan, banks usually prefer funding only up to 80% of the home’s value, giving no consideration to the money that you spend on stamp duty and registration. In such a scenario, NBFCs are more considerable. They may devise ways to fund you an amount which would include your extra costs too, hence enabling the customer take loan of a bigger amount.
This was an example, of two different approaches of banks and NBFCs towards a particular type of loan respectively. In the same manner, their approach to other type of loans is also different. When it comes to loan eligibility, NBFCs have a more relaxed approach.
2. Paperwork and processing:
In the current era of high NPAs, banks have a responsibility to lend with care while same is not the case with NBFCs. NBFCs sanction retail loans much easily as compared to regular banks. Their paperwork and processing is comparatively easy and quick hence taking less time too.
On the other hand, banks are quite thorough with the paperwork and do not prefer to miss on any document, hence taking a very long time to sanction a loan.
The difference is huge, if noticed. While we hear of immediate financing of consumer durables, cars and luxury items through NBFCs; banks generally takes two to three months for the same. It is actually not criticism of banking system but the reality of Indian scenario and hence we see that a larger market is swept by the non-banking financial institutions as compared to regular banks.
Not everything goes against the dynamic banking system of the country. One thing that gives them an edge over NBFCs is the credibility factor. Banks are more credible in case of a doubtful loan situation.They are regulated by a government body as compared to NBFCs which are private companies having their own set of rules and conditions which they can alter anytime as per their choice.
Though banks can also alter their policies but same are done only under the eye of RBI and as per government set rules. In case, of NBFCs, they have enough freedom to devise their own policies.
All in all, one should take the decision of taking loan after seeing the amount that one needs, the time within which one needs the loan and the eligibility criteria like credit scores etc. Accordingly, one should approach either a bank or an NBFC.