Which is better for a home loan bank or NBFC?

The rising cost of real estate has made it difficult for individuals to buy their dream house. This is where a home loan helps them to finance their requirements. Owing to the ease of application, low interest rate, and greater flexibility has prompted individuals to apply for home loans. However, the application process for home loans is easy but it become challenging for the borrowers to choose between a bank or an NBFC. Therefore, for your easy understanding, we have explained here in detail what to choose between a bank or an NBFC while applying for home loans.

Major differences between banks and NBFCs

The given below are some of the differences between banks and NBFCs which you must be aware of:

  • Banks are registered under the RBI Banking Act, 1956, while the NBFCs are registered under the Companies Act, 1956.
  • Banks accept and lend deposits while NBFCs do not.
  • Banks need to maintain a certain CRR (Cash Reserve Ratio), i.e. a percentage of funds, with the Reserve Bank of India whereas NBFCs are not mandated to do so.

Differences in the home loan interest rate

There are differences in the home loan interest rates offered by the banks and NBFCs. This is because the banks are regulated by the Reserve Bank of India, their interest rates are linked to the RBI's repo rate or Marginal Cost of Funds Based Lending Rate (MCLR). Banks offer floating rates of interest which may increase, or decrease based on the change in the RBI’s repo rate. The RBI changes repo rates based on various economic conditions of the country or the global economy. This means that the Equated Monthly Instalment (EMI) on your home loan will be impacted each time the RBI changes the repo rate which may cause the bank to change its Repo-Linked Lending Rate (RLLR) which in turn affects the interest rate on your home loans.

On the other hand, in the case of NBFCs, the interest rates on the home loans offered by them are fixed and are based on the Prime Lending Rate which is not linked with the RBI. Here, you can negotiate with them to get a high amount sanctioned at a nominal rate of interest as they have the power to decide the interest with greater flexibility, which is not possible in the case of the banks. However, customers who fulfil the eligibility criteria and have good credit scores, preferably 700 and above are more likely to negotiate for lower interest rates with NBFCs.

Choosing between a bank or an NBFC for your home loan should be decided after keeping in mind several other factors, such as eligibility criteria, documentation required, processing time and speed, customer service efficiency, and ease of functioning. It is best to weigh these factors and then decide between them.