Bank vs. NBFC - Which Is the Better Choice for Your Home Loan?
09-Sep-2023 | Home Loan
When it comes to purchasing a home, most individuals turn to
financial institutions for assistance in the form of home loans.
Traditionally, banks have been the go-to source for such loans. However,
in recent years, Non-Banking Financial Companies (NBFCs) have emerged
as strong contenders in the lending space, offering attractive
alternatives to traditional banking solutions. In this blog, we will
delve into the key differences between banks and NBFCs in the context of
home loans, helping you make an informed decision about which option
might be better suited to your needs.
Banks: The Traditional Choice
Banks
have historically been the conventional and trusted option for
individuals seeking home loans. This is due to their long-standing
presence in the financial sector, which has established their
credibility and reliability. Banks as lending institutions offer a
different set of advantages for home loan seekers. One of the advantages
of choosing a bank for a home loan is the variety of loan options they
typically offer. Banks are regulated by central banking authorities and
are subject to strict oversight. While banks have traditionally been the
go-to choice for home loans due to their credibility, stability, and
variety of options, it is worth exploring the offerings of NBFCs too as
the lending landscape has evolved and Non-Banking Financial Companies
(NBFCs) have gained prominence as viable alternatives for obtaining home
loans.
Non-Banking Financial Companies (NBFCs): The Modern Alternative
In
recent years, NBFCs have gained prominence, as they are associated with
stability and reliability in the financial sector. When it comes to
home loans, NBFCs offer a range of advantages that make them a preferred
choice for many borrowers.
Flexibility and Innovation:
NBFCs are often more flexible in their lending criteria compared to
banks. They may consider a broader range of income sources, making it
easier for self-employed individuals or those with unconventional income
streams to qualify for a home loan.
Quick Approvals:
NBFCs are known for their faster approval processes compared to
traditional banks. This can be particularly beneficial in situations
where time is of the essence, such as when you're trying to secure a
property in a competitive real estate market.
Customized Solutions:
NBFCs are more inclined to offer personalized loan products tailored to
the specific needs of borrowers. This could include home loan solutions
like construction loans, home renovation loans, home purchase loans,
and many more, which can help borrowers avail loan types according to
their needs and requirements.
Accessibility: NBFCs
often have a wider presence in semi-urban and rural areas, making them
more accessible to individuals who might not have easy access to
traditional banking services.
Factors to Consider When Choosing Between Banks and NBFCs
Loan Terms:
Evaluate the loan terms offered by both options, including repayment
tenure and prepayment options. Choose the option that aligns with your
long-term financial goals.
Customer Service: Consider
the quality of customer service provided by the lender. Prompt and
efficient customer support can greatly impact your overall borrowing
experience.
Eligibility Criteria: Understand the
eligibility criteria set by both banks and NBFCs. If you have unique
income sources or credit history, an NBFC might offer more flexibility
in approving your loan application. It refers to income streams that
are not commonly considered traditional sources of income, such as a
regular salary from a job. These income sources might not fit the
typical mold, but they can still contribute to your overall financial
stability and repayment capacity. They are often unconventional but can
be legitimate and reliable sources of funds based on their policies and
risk assessment.
Some examples of unique income sources could include:
Freelancing or Gig Economy Income:
Income earned from freelancing, consulting, or participating in the gig
economy, where you're paid for individual tasks or projects rather than
having a fixed salary.
Rental Income: Earnings from
properties you own and rent out to tenants. This could include
residential properties, commercial spaces, or even vacation rentals.
Investment Income:
Profits earned from investments, such as dividends from stocks,
interest from bonds, or capital gains from the sale of assets like real
estate or stocks.
Royalties: Payments received for the use of intellectual property like patents, copyrights, and trademarks.
Side Business Income: Money earned from a small business or side project that you operate alongside your regular job.
Pension: Regular payments received upon retirement from your employer or government-sponsored pension plans.
These
income sources might vary in stability, consistency, and
predictability. When applying for loans, especially from NBFCs, which
tend to be more flexible in their eligibility criteria, having a mix of
these unique income sources can help you demonstrate your ability to
repay the loan even if you don't have a traditional job with a fixed
monthly salary.
However, it's important to note that the acceptance
of these income sources can vary from lender to lender. While some
institutions might consider them favorably, others might have stricter
criteria or different policies. It's advisable to check with the
specific lender about their acceptance of unique income sources before
applying for a loan.
Positioning Non-Banking Financial Companies (NBFCs) in the Context of the Indian Financial Landscape
Non-Banking
Financial Companies (NBFCs) hold a prominent role in fostering
financial inclusivity within India. They facilitate access to credit for
both pivotal and specialized segments of the Indian economy, spanning
from infrastructure projects to underserved societal segments. By
channeling resources and extending loans at reasonable rates, NBFCs
contribute significantly to broadening the scope of the Indian financial
domain.
Unlike the conventional banking sector, which operates with
rigorous lending protocols, NBFCs address the challenge of catering to a
vast and varied customer base. The expeditious decision-making, minimal
documentation requisites, and prompt services offered by NBFCs make
them the preferred choice for numerous customers. Moreover, government
initiatives like the 'Make in India' campaign have spurred growth in the
manufacturing sector, resulting in heightened credit demands from heavy
industries. Further, the micro, small, and medium enterprises (MSME)
sector, driven by its appetite for credit, is increasingly turning to
NBFCs for funding solutions.
As per the reports published in Statista, the NBFC credit-to-GDP ratio within India has demonstrated a
consistent upward trend, reaching a level of 13.7 percent during the
fiscal year 2021. This marked an increase from the approximately 12
percent observed in the preceding fiscal year. The gauge for assessing
the credit impact of NBFCs, known as the credit-to-GDP ratio, reflects
the extent of credit provided by NBFCs in proportion to the country's
Gross Domestic Product.
Summing Up
The decision
to opt for a home loan from a bank or an NBFC is not a
one-size-fits-all choice. Both options have their own set of advantages
and considerations. While banks provide stability and regulatory
oversight, NBFCs offer innovation and flexibility with benefits like
fast approvals, minimal documentation, competitive interest rates, and
wide presence in semi-urban and rural areas. Your choice should be
guided by your individual financial situation, long-term goals, and
comfort level with the lending institution.
Before making a decision,
take the time to thoroughly research and compare the terms, interest
rates, and customer experiences offered by both banks and NBFCs.
Ultimately, your home loan should align with your financial aspirations
and provide you with a secure and comfortable foundation for your
homeownership journey.