When you look for a home loan, you will come across two options; the first option is a bank and the second alternative is a Non-Banking Finance Company (NBFC), such as a Housing Finance Company (HFC). The Housing Finance Company is regulated by the National Housing Bank and is of great help in financing the acquisition or construction of houses.
When you have to choose between the two, you need to consider various factors like the interest rate, processing fees and loan tenure, among others. Both the options might seem similar. However, banks and HFCs have several differences.
Explained ahead are the key pros and cons of taking a home loan from a bank and an HFC to give you a better understanding.
Home loan from banks: Key advantage
Immediate benefit from the changes in interest rate
Banks have a Marginal Cost of Funds-based Lending Rate (MCLR), which is controlled by the Reserve Bank of India (RBI). As directed by the RBI, banks need to link home loans to their marginal cost of borrowing across terms. Banks pass the interest rate changes to you earlier than HFCs because the interest rates of the bank are linked to MCLR. In the case of housing companies, these rates are linked to the Benchmark Prime Lending Rate (BPLR). In MCLR, the interest rate charged on current loans is revised on the date when the revision happens. This revision can happen on a half-yearly or yearly basis.
Banks offer attractive interest rates on home loan as compared to HFCs. They also provide an overdraft facility to reduce the loan liability.
Home loan from banks: Main drawback
Complex application procedure
Most banks have a complex process when it comes to application and the essential documents required for home loan. This makes the application process time-consuming. Additionally, if you have a low credit score, you might not get a loan easily.
Home loan from HFCs: Key advantage
High loan amount
When approving the loan, an HFC includes the cost of registration and stamp duty in its valuation. As compared to traditional banks, the loan amount sanctioned by HFCs is significantly higher. For instance, if the property’s cost is INR 50 lakh and stamp duty and registration costs are INR 3 lakh, HFCs will consider the property’s total value as INR 53 lakh and will sanction the loan as per this amount. Banks will not consider the stamp duty and registration charges and provide you with a home loan as per the property value of INR 50 lakh.
As compared to banks, HFCs are quite relaxed about the credit score and they have a quick documentation process as well.
Home loan from HFCs: Main drawback
HFCs charge a higher rate of interest on home loans as compared to banks. HFCs take time to pass the interest rate cut to borrowers because they base the lending rates on the BPLR.
Both banks and HFCs have their pros and cons. You need to analyze these carefully before choosing your preferred lender. You need to enquire if the lender provides the facility of prepayment of home loan and the charges associated with the same if you wish to repay your liabilities earlier.
Before you settle for a home loan, it is recommended to compare various deals offered to you by the different financial institutions. This will help you find the best home loan for yourself. Home loans available at Finserv Markets come with attractive interest rates and other lucrative features such as flexible repayment options, less processing fees, minimal documentation, instant approval, and quick disbursal. You can avail a loan amount of up to 3.5 crores with a repayment tenure of 25 years. A high credit score will help you avail a higher loan amount at a reduced rate of interest. Lastly, make sure to read the terms and conditions of the loan agreement carefully before signing it. This will help you avoid any inconvenience in the later stages.
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