- Date : 13/01/2021
- Read: 8 mins
No two lenders offer the same interest rate; every institution has its own distinct evaluation criteria.
While loans have become increasingly easier to avail of in India, borrowers often face a vexing dilemma when it comes to actually applying for one: which is the more convenient option - the traditional bank, or the newfangled non-banking finance company (NBFC)?
Two critical factors often swing the vote in favour of NBFCs, especially for personal and education loans. First, they take less time in approving loan applications; and second, they lay less stress on the applicant’s credit score. Indeed, many NBFCs offer loans to those with low (or zero) credit score.
Of late, NBFCs are finding more and more takers even for home loans, thanks to the high-value loan amounts and the attractive schemes they offer. Besides, they have been trying to bring down their interest rates to the levels of banks for all types of loan categories.
For instance, the interest rate NBFCs charge on personal loans range from 11.25% to 17.85%, which is quite competitive when compared with bank rates. State Bank of India (SBI) charges 9.6%-15.65%; ICICI levies 11.25%-21%; HDFC Bank charges 10.75%-21.30%, and Axis Bank charges 12%-24%.
Note: Rates and fees are subject to change
The overview discussed in the next section can help us get a broad idea where each of these stands in regard to various factors that customers typically consider.
Broad comparisons between a loan from bank or NBFC
What does a borrower think of when they consider taking out a loan? Their worries most likely will be: Do I qualify? What kind of documents will I be asked for? What will be the interest rate? How long will it take?
Let us explore these aspects and a few more:
This is one of the most common worries of a would-be borrower: their eligibility for the loan. As stated earlier, NBFCs are less stringent than banks when considering the borrower’s profile.
For instance, banks typically ask for the following documents when you apply for a personal loan:
- Proof of age and identity (passport, Aadhaar card, voter’s ID card)
- Proof of residence (house registration certificate, sales deed, Aadhaar card, voter’s ID card)
- PAN card
- Proof of income, such as Form 16, salary slips, bank statements, income-tax certificate
Generally, these are required to be filed along with the self-attested loan application form and passport-size photographs. However, it is advisable to remember that every lending institution - be it a bank or an NBFC - has its own set of eligibility criteria for their various loan categories; failure to meet these can result in your loan application being rejected.
This is a major source of worry for borrowers: the interest rate the lender will charge for the loan. If you are eligible - that is, you meet all the criteria that your preferred lender asks for - your best bet is a bank; in general, they charge lower interest rates than NBFCs and are more transparent.
This is especially true with respect to home loans, with banks offering rates that have dipped below 7%, the lowest in more than a decade.
As per media reports, Kotak Mahindra rates start at 6.75%, Union Bank of India at 6.8%, while SBI, HDFC, and ICICI Bank offer home loans at 6.9% onwards. However, note that most banks don’t offer fixed interest rates; these home loan rates are ‘floating’ rates. In other words, the interest rate can go up or down in tune with the changes in the policy rates of the Reserve Bank of India (RBI).
So. if you see an advertisement announcing ‘lowest rates’ on home loans, remember that these would depend on factors such as your age, income, credit score, property value, project location (city), and even your gender. For instance, a salaried woman can avail of an SBI loan of up to Rs 30 lakh at 6.9% if she applies through the bank’s YONO app. For salaried men, the rate is 6.95%. If the applicant does not use the YONO app, the rates are higher.
Such conditions are often not highlighted in an advertisement, which means you should check your eligibility across multiple lenders before deciding on one.
Banks cannot change their interest rates, but you can negotiate interest rates with an NBFC. This is primarily due to the laws governing the respective lenders. Also, banks have to abide by the regulations of the RBI, with the policy changes dictating their rates - meaning their rates increase or decrease along with changes in RBI policy - and not as per their discretion.
Moreover, bank rates are directly linked to MCLR (Marginal Cost of Funds Based Lending Rate), which is the minimum lending rate below which a bank is not permitted to lend. What this implies is that you cannot negotiate with banks to offer a lower interest rate just for you.
On the other hand, you can negotiate interest rates with NBFCs, which have been created under the Companies Act, 1956. Their interest rates are not linked to the RBI, but their internal benchmark, the prime lending rate (PLR). This allows NBFCs to be more flexible in offering tailored products with less strict eligibility criteria; so, you can negotiate to get a high amount sanctioned at a lower rate of interest.
This is true for most types of loans, including personal loans as well as home loans. However, remember this would depend on you fulfilling all the required eligibility criteria and having a good credit score, which will be discussed later.
This flexibility goes beyond interest rates, as in education loans; NBFCs are more amenable to offering loans for pursuing offbeat courses. They also offer loans covering the entire tuition fees, as opposed to banks, which keep a margin of about 15%.
Ultimately, NBFCs are less strict than banks, which sanction loans mostly for courses with more assured job prospects that speak of a good potential income in future.
This can be a major issue during a crisis, such as a medical emergency. In general, NBFCs are quicker to process loans, with many offering instant loans - often within 72 hours, provided you meet their eligibility criteria, and your loan application is correctly filled. However, banks too are known to approve personal loan instantly for existing and pre-approved customers.
NBFCs also enjoy another edge over banks: being new entities, they are more attuned to modern practices; and all of them provide online application processes and apps. This enables prospective customers to apply for a loan instantly from anywhere, anytime.
Offers and servicing
NBFCs are also more likely to offer schemes and discounts, such as waiving processing fees or offering a discount on interest rates for the initial year(s). Alongside, they are friendlier and more prompt in offering client support and are often available 24x7 through call centres and online advisory services.
This requires a separate mention because as mentioned earlier, both banks and NBFCs will check your credit score - though with the latter, the leeway is likely to be more. But either way, the chances of your loan application getting sanctioned will be enhanced if you improve your CIBIL credit score.
This is because a high score reflects your creditworthiness, which makes you eligible for the lowest interest rates from banks and NBFCs. And ideal CIBIL credit score is 750; if it is lower than this, you should look for ways to improve it. One way to do this is to avoid missing repayments of your credit card bill or loan dues, as that can adversely impact your credit score, and lead to rejection of your application.
But even if your loan is sanctioned, banks and NBFCs will take a call on the rate of interest on the basis of your repayment history; if they find you have cleared your EMIs and credit card bills on time, the interest rate could be lower.
As we just saw, NBFCs enjoy several distinct advantages over banks, though it would be better if you check the trustworthiness of the lender in question. For banks, what trumps these advantages are their interest rates, which are typically lower. Besides, banks are much more transparent.
However, no two money lenders offer the identical rate or loan amount as everyone has their own unique evaluation criteria, so you will have to research to look for the best deal. At the same time, it is advisable not to apply with different lenders simultaneously, as this could attract the attention of credit bureaus such as CIBIL; too many hard enquiries for loans or credit cards can make you seem a compulsive borrower, which could adversely impact your credit scores. Read this complete guide on how you can take charge of your credit score.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.