A bank or an HFC: Which is better for a home loan?

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May 26, 2021 1:30 AM

If you are looking for a transparently-priced loan interest benchmark, can wait a bit longer for loan processing, have a credit score over 750 and easily fulfil the eligibility criteria, you may go for a bank home loan

Also, the cheapest bank loan rates are often reserved for women loan applicants/co-applicants with stellar credit scores.

If you’re planning to buy a house, chances are you may be confused about where to take the home loan from— a bank or a housing finance company (HFC). It is important for homebuyers to choose the right type of lender according to their requirements. They need to make a pragmatic and informed choice based on critical factors such as applicable interest rates, cost and ease of borrowing, eligibility criteria, etc.

Getting a home loan from a bank
Banks not only deal in home loans but also offer various other types of loan products such as car loans, personal loans, business loans, gold loans, etc. Floating rate bank home loans disbursed after October 2019 need to be linked to an external benchmark like the Reserve Bank of India’s (RBI) repo rate. So, if the repo rate is the underlying benchmark of a bank home loan, borrowers would see quick and proportional changes in their applicable loan interest rate with the changes in the key policy rate.

The idea behind introducing the new loan regime was to enable quick transmission of rate-cut benefits to the borrowers. However, they should also keep in mind their equated monthly instalments (EMIs) are likely to go up as and when the repo rate sees a hike.

That said, banks offer home loan products with different EMI options, such as a home loan with an overdraft facility, home loan with step-up or step-down EMI payment options, flexible repayment plans, etc. Banks may take a considerable amount of processing time for loan approval unless they are pre-approved in nature.

An aspiring borrower has to fulfil a long list of eligibility criteria to get a home loan from a bank. If their credit score is not up to the mark (read below 750), the bank may charge a higher risk premium which translates to a higher interest rate on the loan. Also, the cheapest bank loan rates are often reserved for women loan applicants/co-applicants with stellar credit scores.

Getting a home loan from an HFC
HFCs are non-banking finance companies (NBFCs) that specialise in home loans. Their loan products are restricted to home loans and allied instruments. The eligibility criteria for HFC loans could be less stringent than banks. They often allow flexibility while considering the income criteria, credit score, margin money requirement, repayment period, etc. of the applicant. The loan processing time with HFCs could also be quicker and relatively hassle-free.

However, HFC home loan interest rates are pegged to their prime lending rates that are sometimes higher than bank home loan rates although the gap between the lowest interest rates offered by these entities has shrunk significantly in recent months.

However, in terms of processing fee and penalties, HFCs could be costlier than banks. Also, since HFCs peg their interest rates to their prime lending rates and not the repo rate like most banks, they might take longer in passing any rate-cut benefits arising out of a fall in the repo rate to their borrowers.

How to make a choice
You should carefully evaluate your actual loan requirements to make the right decision while selecting a lender. If you are looking for a transparently-priced loan interest benchmark, can wait a bit longer for loan processing if required, have a credit score over 750 and easily fulfil the eligibility criteria, you may go for a bank home loan.

On the other hand, if you are falling short of the eligibility criteria of banks or want a shorter processing time, you may opt for a home loan with an HFC even if that involves a slightly higher interest rate. That said, you can always switch your loan to another lender if you’re not satisfied with your existing lender. However, instead of paying the cost for switching the loan and to avoid unnecessary hardship, it’s always better to cautiously select a lender that best meets your requirements on the first go.

The writer is CEO, BankBazaar.com

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