• Choosing between a bank and NBFC for your home loan

    The rising costs of real estate, whether it is an apartment or an independent house, has made it almost impossible for most of India to be able to buy a home of their own without the help of a home loan. However, home loans are now available with very affordable interest rates and other attractive features, making it easier than ever to make your dream home a reality.

    Home loans are offered by a wide range of banks and Non-Banking Financial Company (NBFC). There are many factors to keep in mind when applying for a home loan, but perhaps the first and most important decision you have to make is whether to apply for your home loan from a bank or an NBFC. Here is all you need to know to make an informed decision between a bank and NBFC for the best home loan.

    Major differences between banks and NBFCs

    Some of the major differences between banks and NBFCs are as given below:

    • Banks are registered under the RBI Banking Act, 1956, while NBFCs are registered under the Companies Act, 1956
    • Banks can accept and lend deposits while NBFCs cannot
    • Banks are mandated to maintain a CRR (Cash Reserve Ratio), a percentage of funds, with the Reserve Bank of India whereas NBFCs are not mandated to do this

    Differences in the home loan interest rate

    There are differences in the home loan interest rates between banks and NBFCs. Because banks are regulated by the Reserve Bank of India, their interest rates are linked to the RBI’s repo rate or is linked to the Marginal Cost of funds-based Lending Rate (MCLR). Banks offer floating rates of interest which can increase or decrease based on the RBI’s repo rate changes. The RBI changes repo rates based on various economic conditions pertaining to the country or the global economy. This means that the Equated Monthly Instalment (EMI) on your home loan will be impacted each time the RBI changes the repo rate which may cause the bank to change their Repo-Linked Lending Rate (RLLR) which in turn affects the home loan interest rate.

    However, in the case of NBFCs, the interest rates on their home loans are fixed and are based on the Prime Lending Rate which is not linked with the RBI. This Prime Lending Rate is determined by the lender which means that customers have the leeway to negotiate for lower interest rates and other favorable terms and conditions, which they may not get the freedom to negotiate with banks. However, only customers who meet the eligibility criteria and have high credit scores may be able to negotiate such terms and lower interest rates with NBFCs.

    Choosing between a bank or an NBFC for your home loan should be decided keeping in mind several other factors as well, such as eligibility criteria, documentation required, processing time and speed, customer service efficiency, and ease of functioning. It is best to weigh these factors and then decide.

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