Every person seeking a home loan must confront the all-important question: Should the loan be taken from a bank or an NBFC?
Every person seeking a home loan must confront the all-important question: Should the loan be taken from a bank or a Non-Banking Financial Company (NBFC)? To answer this question, one must know the salient differences between the two options and then make the choice. The differences range from interest rates, loan-to-value ratio, credit score requirements, and processing.
Let’s take a deeper look at the differences.
Interest Rate Benchmarks: MCLR vs PLR
Since April 1, 2016, all new bank loans (and subsequently the older, base-rate linked loans) are now linked to the Marginal Cost of Funds-based Lending Rate, or MCLR. Quite simply, MCLR is the lowest rate at which a bank can lend. All banks must declare MCLRs of various tenors (overnight, one month, six months, one year, two years, and three years). Upon the MCLR, the bank can apply a spread basis the borrower’s gender, credit score, income and loan requirement. For example, the SBI is benchmarked to the one-year MCLR (currently at 8.45%), and their spreads range from 10 basis points (for term loans under Rs. 30 lakh for salaried women) to 80 basis points (for loans above Rs. 75 lakh for non-women, non-salaried borrowers).* Therefore, SBI’s interest rates on term loans range from 8.55% to 9.25%. MCLR-linked loans also have fixed rate reset dates (such as once in a year) when the interest rate automatically resets to the prevalent rate.
* data as advertised on the bank website on June 20, 2019.
Loans from NBFCs and Housing Finances Companies (HFCs), on the other hand, are linked to the Prime Lending Rate (PLR). While banks are governed by the Reserve Bank of India, NBFCs are governed by the Companies Act. NBFCs, therefore, are free to set the PLR as per their business requirements. This allows NBFCs greater freedom in setting their interest rates to suit the demands of customers, especially customers who don’t meet the eligibility criteria of bank loans.
Bank Vs NBFC Comparative Chart:
Loan To Value Ratio
Your property purchase price is only its base price. Let’s say your house costs Rs 100. Above this, you will be required to pay stamp duty and registration charges to the government. In Delhi, for example, these charges are 5-7% of the sale value. Above this, for an under-construction property, you’ll need to pay 5% GST. Including the costs of amenities, khata charges, power back-up, water and electricity connections, brokerage, furnishing, loan processing, shifting etc., you may need to pay another 5-10%. In a typical scenario for an under-construction house, your total cost may range from Rs 115 to 125. How much of this can be obtained via a loan? Typically, banks will fund up to 80% of the purchase value. And you’ll need to finance the remaining costs yourself.
NBFCs have more relaxed norms when it comes to the loan-to-value ratio. While no lender will fund 100% of your costs, an NBFC is likelier to include the associated costs of home ownership. This, then, allows a borrower to have larger loan eligibility, which may mean being able to borrow larger amounts, buy larger homes, and be able to buy properties with premium amenities such as swimming pool, gym, power back-up etc. Therefore, NBFCs have a slight edge here.
Credit Score Requirements
Your credit score decides how good a deal you’re going to get on your loan. With a score of 750 or more, you’re going to get the best loan deals. To find out what your credit score is, you can download your free credit report from websites such as BankBazaar. NBFCs and HFCs have in the past had a more relaxed approach towards credit scores. They may still be able to tailor loan products for borrowers with low scores. However, this may mean having to pay a higher interest rate on the loan. If you are a home loan seeker with a low credit score, it may be a good idea for you to borrow from an NBFC. Thereafter, improve your credit score with timely EMI payments. With an improved score, you can transfer your loan to a bank loan offering a lower interest rate. This way you can save yourself a lot of money in the long run. On the other hand, if you have a good credit score, you can compare the options you have between banks and NBFCs and go with the one offering you the best deal.
Paperwork & Application Processing
Both banks and NBFCs have stringent norms. That being said, the documentation requirements at NBFCs may in some cases be lower compared to some banks. For example, some lenders may approve loans for ‘B’ khata properties, which the leading banks will not. For less stringent vetting, the NBFCs may charge the borrower a higher rate of interest. The borrower must ultimately decide what’s best for him.
Lastly, some banks may offer you a home loan overdraft facility which is helpful if you don’t have regular income and periodically need your home loan payments back. In such a loan account, whenever you have liquidity, you can park it in the overdraft account. The payment would reduce your long-term interest by lowering your loan balance. But in case you needed your money back, you could just withdraw it from the account, and the loan balance would be readjusted. Such a facility is not available with NBFCs.
The loan market is big and diverse. But don’t apply for multiple loans at once. This would harm your credit score. Always go online to compare all your options and thoughtfully select one option that works best for you.
(The writer is CEO, BankBazaar.com)