When a financial emergency strikes, we tend to prefer a lender who can quickly disburse the money we need despite less favourable terms. We usually approach the banks or Non-Banking Finance Companies (NBFCs) for all our borrowing needs.
As a borrower, you may be in a confused state as to choose the best one. Through this article, CreditMantri gives you a comprehensive analysis on the loans offered by banks and NBFCs.
Banks vs. NBFCs
Both, banks and Non-Banking Finance Companies (NBFCs), offer financial services to their customers. However, it is important to note the key differences between both the financial bodies. Banks are regulated by Reserve Bank of India and incorporated by Banking Companies act.
NBFC is a financial company registered under Companies Act 1956, and in many aspects, an NBFC does not come under the purview of RBI. Services like demand deposits, issuing cheques and drafts cannot be provided by NBFCs.
Banks are part of the payment and settlement system which allow their account holders to send and receive money. NBFCs cannot facilitate this their customers.
Rate of Interest
Rate of interest is an important aspect in all types of loans. For the banks, the interest rates are linked to the Marginal Cost of Lending Rate or MCLR, which is mandated by the RBI. Hence, banks do not have the freedom to increase or decrease the rate of interest.
As NBFCs do not come under the gambit of RBI, deciding the rate of interest is up to their discretion. This paves way for NBFCs to set their own terms and conditions.
NBFCs do not have several loan products unlike banks and they operate from fewer locations. As the focus is high on profitability, the rate of interest is likely to be higher with the NBFCs. However, the loan approval rate is higher with less paperwork.
According to recent RBI report, NBFCs have increased their customer base and profit by 15 percentage points.
Eligibility Criteria
Both the financial entities check credit scores and repayment capacity of the applicants. However, banks have stringent eligibility criteria for a loan application as per the lending rules. On contrary, NBFCs provides a relaxed approach when it comes to loan eligibility.
In case of a home loan, NBFCs include extra costs like stamp duty, registration fee in the loan for the benefit of the customers.
Overdraft Facility
When your loan amount is huge, banks allow you to park a surplus amount in your account which will be considered as pre-payment for your loan. The benefit of this facility is that the rate of interest will be calculated only for the balance loan amount which will considerably lower your debt burden. The borrower can also withdraw from the parked money when required subject change of interest.
NBFCs do not provide overdraft facility and this is where banks score better than NBFCs.
Credit Score
A good credit score always gives you an edge in obtaining favourable loan terms from both the entities. However, NBFCs are less stringent about credit score when compared to banks. An applicant with a low credit score is likely to get a loan from NBFCs while it may seem impossible to get one from the banks.
Summary
Lot of factors are involved in picking the right one for you. Loan eligibility, rate of interest, credit score, repayment capacity, EMI and tenure are some of the criteria to be considered in a loan application.
Any lender who provides the cheapest loan with the favourable terms is obviously the best option. Though the banks are stringent about the application processes, you can acquire a lot of benefits if you have a high credit score and better eligibility criteria. Moreover, women get special discounts on loans through banks.
Not to forget, NBFCs too are becoming competent against banks and provide attractive offers to increase their customer base. If you are in a desperate need for a loan, approaching an NBFC is a viable option for a quick result.
The choice of choosing the right lender ultimately comes down to you. Evaluate all the possible options, future financial goals and pick the lender accordingly.