Pros and cons of availing a loan from NBFC Vs Bank

By: |
November 08, 2021 3:43 PM

Availing a loan from an NBFC has its share of pros and cons, which the borrower should be aware of as it can impact the cost of the loan: Experts

personal loan, personal loan interest rates, eligibility criterion to boost personal loan approval chances, Credit score, EMI affordability, Employment profile, loan applications, SBI, HDFC Bank, PNB, ICICI Bank, Axis Bank, digital savings bank account, savings bank account, online savings bank account, state bank of india, sbi debit cards, digital transaction, sbi credit card, digital payment, neobank, teen neo bank, neo bank, finin, savings at an early age, recurring savings plans, smart teenagers, Split Bills function, settle bills easily, financially aware teenagers, personal card, smart money app, financial planning, money management skills, financially responsible adults, poor financial decisions, wealth creation, personal finance, RBI, RBI caution, fraudulent transactions, bank frauds, mobile numbers, toll free number, RBI, digital payment, Unified Payments Interface, UPI, Aadhaar-enabled Payments System, AePS, Internet Banking, RBI caution borrowers, How can borrowers protect themselves, fraudulent lending apps, loan, unauthorized digital lending apps, illegal apps,The collateral becomes a negative point as a large section of borrowers either do not own eligible collateral or hesitate to pledge it.

Having a good credit score plays a huge role in getting approval for a loan especially from banks; i.e. having a credit score of 750 or higher will give you access to a broader array of lenders and better interest rates. When applying for any type of credit, be it a loan or a credit card, a good credit score usually means a greater range of choice for the borrower in terms of lenders and loan offers, and attractive interest rates and fees.

Credit scores are preferred by lenders as they represent the borrower’s history with credit as recorded in his/her credit reports. Industry experts say credit reports help lenders understand how experienced and responsible the borrower is in handling debt. Therefore having a higher credit score relates to having lower chances of failing to repay debts. If a borrower’s credit score is too low, banks and financial institutes do not offer them credit at all.

Alternatively, to help such borrowers digital lenders and NBFC’s have been offering loans and instant credit. Industry experts say the trend usually picks up during the festive season, in collaboration with all online shopping platforms. Even though this form of credit can be easily availed, it comes with its shortcomings.

“Availing a loan from an NBFC has its share of pros and cons, which the borrower should be aware of as it can impact the cost of the loan,” says Ankit Mehra, CEO and Founder, Gyandhan. Usually, customers opt for an NBFC for its different loan products and easy process. He further adds, “NBFCs provide both secured and unsecured loans without any cap on the maximum amount; whereas government lenders and banks usually require collateral if the loan amount exceeds Rs 7.5 lakhs.”

Having said that, the collateral becomes a negative point as a large section of borrowers either do not own eligible collateral or hesitate to pledge it. This, according to Mehra, effectively makes NBFCs a top choice for any kind of loan. Additionally, the application evaluation model of an NBFC is also not restricted to the collateral value, which is the case with banks; instead, they consider multiple factors like the profile of the applicant, their repayment capability, and the strength of the co-applicants profile.

The flexibility afforded in terms of the co-applicant required and the number of co-applicants for a loan, experts say also works heavily in the favor of an applicant, especially in the case of student loans with retired or pensioner parents. Note that this facility is not available on a loan from a bank where a co-applicant can only be someone from an immediate family.

Mehra points out, “Given the objective evaluation model, there are more chances of being approved for a loan even when the applicant profile maybe average. It does impact the rate of interest they offer – where banks have a fixed range of rate of interest – no applicant will walk out of an NBFC with the same rate, which is calculated on a case-to-case basis.”

Despite the apparent benefits of an NBFC, when compared to a bank, keep in mind, they offer a higher rate of interest, with no tax benefits, and in some cases, no moratorium period provided to the borrower. “A general rule of thumb especially for an education loan is that borrowers should opt for banks when applying for a loan with collateral. It brings down the cost of the loan, especially in terms of the processing fees and the interest rate of the loan,” adds Mehra.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1YOUR QUERIES: INCOME TAX: No tax benefit on loss on FD due to insolvency of finance company
2Your Money: ‘Good’ and ‘bad’ debts: Know the differences
3Equity investing: What’s your strategy in this volatile market?