- Date : 02/06/2021
- Read: 4 mins
Wondering whether you should approach a bank or NBFC to service your car loan? This article will help you decide.
A car loan allows people to fulfill a need and realise an aspiration. More importantly, it lets them repay the outstanding amount in pocket-friendly installments. A large number of scheduled public/private sector banks, as well as non-banking financial companies (NBFCs) offer vehicle loans. Many prospective borrowers find it difficult to choose one over the other. So, here are some quick pointers that can help you make an informed decision.
Interest rate
The rate of interest tends to be the primary concern for loan applicants. The car loan interest rate in case of a bank is determined basis various regulations as mandated by the RBI and is linked to the marginal cost of funds-based lending rate (MCLR). On the other hand, the base rate for NBFCs is dependent on the prime lending rate (PLR) and has a lot more flexibility with regard to the interest rate as it is not stipulated by the RBI. However, banks usually offer lower interest rates than NBFCs. Just to get an idea, some banks have car loan interest rates starting at 7.1% while the lowest interest rate on offer from NBFC's is about 8.75%.
Related: NBFCs and banks: How are they different?
Loan eligibility
Banks have to be compliant with RBI rules and have very little wiggle room to offer any kind of relaxation on the car loan eligibility. NBFCs are subject to fewer rules and less scrutiny, and can therefore decide the risk exposure they want to take. Most of the time, they will sanction loans based on the borrower’s repayment capacity, any other assets they own, and their credit score. In this sense, a loan from an NBFC tends to be more flexible.
Most banks and NBFCs offer up to 100% funding of the vehicle's ex-showroom price, with repayment tenures ranging between 3, 5, and 7 years. However, when it comes to used cars, most banks cap their funding at 80% of the Insured Declared Value (IDV) of the vehicle, while NBFCs usually offer higher eligibility of 95-100% of the IDV, albeit at higher interest rates.
Related: 5 Things to know about a used car loan
Credit score
A good credit score will help you get favourable interest rates from both banks and NBFCs. Still, banks may turn away customers who do not meet the cut-off threshold as prescribed by the underwriting rules. It is relatively easier for people who are new to the system (such as students and young working professionals) or those with lower credit scores to get a car loan from an NBFC, although at higher interest rates.
Related: Taking Charge Of Your Credit Score
Process and paperwork
While the basic documents required for a car loan - income proof, address and identity proof, credit score, etc. – remain the same across lending entities, banks have to be extremely thorough with their paperwork and approvals to minimise the chance of being saddled with a non-performing asset (NPA). So, the entire process from application to approval can take days. One reason why NBFCs have been able to attract a lot of business is thanks to swift approvals – with luck, you can avail of a loan in just a few hours!
Related: Planning to buy a car insurance? Look for these details before you buy
Last words
The choice between a bank and NBFC car loan must be made keeping in mind your specific requirements, as well the interest rates and processing timelines and how they affect you. A car loan is a medium-term liability that would need to be serviced for anywhere between three and seven years. So, it is important to have a thorough understanding of the loan product you opt for irrespective of the constitution of the financial entity – whether it is a bank or an NBFC. Bank or NBFC: Which can you get the best deal?
A car loan allows people to fulfill a need and realise an aspiration. More importantly, it lets them repay the outstanding amount in pocket-friendly installments. A large number of scheduled public/private sector banks, as well as non-banking financial companies (NBFCs) offer vehicle loans. Many prospective borrowers find it difficult to choose one over the other. So, here are some quick pointers that can help you make an informed decision.
Interest rate
The rate of interest tends to be the primary concern for loan applicants. The car loan interest rate in case of a bank is determined basis various regulations as mandated by the RBI and is linked to the marginal cost of funds-based lending rate (MCLR). On the other hand, the base rate for NBFCs is dependent on the prime lending rate (PLR) and has a lot more flexibility with regard to the interest rate as it is not stipulated by the RBI. However, banks usually offer lower interest rates than NBFCs. Just to get an idea, some banks have car loan interest rates starting at 7.1% while the lowest interest rate on offer from NBFC's is about 8.75%.
Related: NBFCs and banks: How are they different?
Loan eligibility
Banks have to be compliant with RBI rules and have very little wiggle room to offer any kind of relaxation on the car loan eligibility. NBFCs are subject to fewer rules and less scrutiny, and can therefore decide the risk exposure they want to take. Most of the time, they will sanction loans based on the borrower’s repayment capacity, any other assets they own, and their credit score. In this sense, a loan from an NBFC tends to be more flexible.
Most banks and NBFCs offer up to 100% funding of the vehicle's ex-showroom price, with repayment tenures ranging between 3, 5, and 7 years. However, when it comes to used cars, most banks cap their funding at 80% of the Insured Declared Value (IDV) of the vehicle, while NBFCs usually offer higher eligibility of 95-100% of the IDV, albeit at higher interest rates.
Related: 5 Things to know about a used car loan
Credit score
A good credit score will help you get favourable interest rates from both banks and NBFCs. Still, banks may turn away customers who do not meet the cut-off threshold as prescribed by the underwriting rules. It is relatively easier for people who are new to the system (such as students and young working professionals) or those with lower credit scores to get a car loan from an NBFC, although at higher interest rates.
Related: Taking Charge Of Your Credit Score
Process and paperwork
While the basic documents required for a car loan - income proof, address and identity proof, credit score, etc. – remain the same across lending entities, banks have to be extremely thorough with their paperwork and approvals to minimise the chance of being saddled with a non-performing asset (NPA). So, the entire process from application to approval can take days. One reason why NBFCs have been able to attract a lot of business is thanks to swift approvals – with luck, you can avail of a loan in just a few hours!
Related: Planning to buy a car insurance? Look for these details before you buy
Last words
The choice between a bank and NBFC car loan must be made keeping in mind your specific requirements, as well the interest rates and processing timelines and how they affect you. A car loan is a medium-term liability that would need to be serviced for anywhere between three and seven years. So, it is important to have a thorough understanding of the loan product you opt for irrespective of the constitution of the financial entity – whether it is a bank or an NBFC. Bank or NBFC: Which can you get the best deal?
