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Which Is The Best for a Home Loan – Bank or HFC?

Choosing between Housing Finance Companies (HFCs) and traditional banks for obtaining a home loan can be a difficult decision for potential homebuyers. 

HFCs operate under a license granted by the National Housing Board (NHB) and provide home loans in line with NHB guidelines while banks are subject to regulations by the Reserve Bank of India (RBI). Read on as we dive into both options, examining their advantages and disadvantages to help you make an informed choice when taking home loans.

Home Loan Finance Companies 

HFCs are corporate entities operating under the Companies Act of 1956. Their primary focus is to provide home loans through various direct or indirect means. Although they were regulated by the National Housing Bank (NHB), the handling of HFCs was transferred to the Reserve Bank of India (RBI) in 2019. However, certain regulatory powers still remain with the NHB.

Currently, more home loans are disbursed by HFCs than banks, primarily due to their greater flexibility. There are more than 25 HFCs operating in India.

Difference Between HFC vs. Bank for Home Loans

Comparison between banks and housing finance companies:

Interest Rate:

  • Banks offer slightly lower interest rates, often tied to the Marginal Cost of Funds based Lending Rate (MCLR) established by the RBI. On the RBI-driven base rate, banks apply their own margin. 

Eg: if the base rate is set at 7%, a bank may include a 0.5% margin and provide home loans at an interest rate of 7.5%.

  • HFCs follow the Prime Lending Rate (PLR) method to determine their interest rate, which is not governed by the RBI and tends to be higher when compared to banks. On this rate, the HFC applies a discount.

Eg: if the PLR is 14%, an HFC can apply a discount of 5%, resulting in home loans offered at 9%.

Flexibility:

  • Bank loan processes are fairly stringent, do not offer much flexibility and might involve extensive paperwork and processes.
  • HFCs are known for high flexibility in loan approval, featuring a streamlined and uncomplicated process.

Credit Facility:

  • Banks provide overdraft facilities based on regular Equated Monthly Installment (EMI) payments and a favourable credit score.
  • HFCs do not offer banking facilities like overdraft or credit on their sanctioned loans.

Documentation Process:

  • The documentation process at banks can be protracted and time-consuming.
  • HFCs expedite the documentation process, making it efficient and less time-consuming.

Processing Time:

  • The loan disbursement process at banks is often protracted, resulting in longer average processing times.
  • HFCs are known to process loan applications quickly, thereby leading to quicker loan sanctioning and reduced processing durations.

Credit Score:

  • Banks maintain stringent standards regarding applicant credit scores and tend to reject applicants with lower scores.
  • HFCs demonstrate flexibility in considering applicant credit scores during the loan evaluation process.

Advantages and Disadvantages of HFCs 

Advantages

  1. Flexible Loan Approval: HFCs typically offer more flexibility in loan approval than banks. They have streamlined processes and often require less stringent paperwork, making it easier and quicker for borrowers to obtain a loan.
  2. Acceptance of Lower Credit Scores: HFCs are quite lenient when it comes to considering lower credit scores. They are known to be more willing to provide home loans to individuals with not-so-great credit histories, thereby offering home loans for those who might face challenges in securing a loan from banks.

Disadvantages 

  1. Higher Interest Rates: HFCs offer home loans with higher interest rates than banks, potentially resulting in higher overall interest payments over the loan tenure and increasing borrowing costs.

Advantages and Disadvantages of Banks

Advantages

  1. Lower Interest Rates: Banks often offer home loans at lower rates than HFCs, leading to significant savings in interest payments over the loan tenure.
  2. Banking Facilities: Banks, by definition, provide a comprehensive range of banking services and facilities including overdrafts. These facilities allow borrowers to take advantage of leveraging surplus funds to reduce their loan liability and make additional withdrawals as needed.

Disadvantages

  1. Rigid Loan Approval Process: Banks typically have a standard and rigid loan approval process that involves extensive documentation and scrutiny. Such criteria can result in longer loan processing times and challenging for some borrowers to qualify for a home loan.

What Should You Choose Between Banks and HFCs?

In recent years, leading HFCs have made remarkable enhancements to their loan products and services. This makes the HFCs a very compelling option for those who seek lenders with flexible eligibility criteria. At the same time, if you have a long-standing relationship with any bank and meet their rigorous eligibility criteria, it may be best to go to that same bank for your home loan. In any case, do ensure to do a full comparison before proceeding.

FAQs on HFCs and Banks

1. How is HFC different from other financial institutions?

HFCs can choose the discount on their lending rate based on customer requirements and prevailing market conditions. This allows them to offer customized interest rates to suit the needs of individual borrowers.

2. What role do HFCs play in the overall banking ecosystem?

HFCs play a vital role in India’s housing sector, offering home loans and financing for housing-related requirements to both individuals and builders. They bridge the gaps that traditional banks may leave unaddressed, contributing significantly to the growth and accessibility of housing credit in India.

3. How can I apply for HFC finance, and what are the eligibility criteria?

Age, income proof, work experience, credit score, and credit history are considered to decide eligibility. Arrange the documents required and apply online or visit an HFC branch. The HFC will evaluate the property and decide on the loan amount based on the eligibility. 

4. Can I expect different interest rates or loan terms from banks compared to finance companies?

Yes, Banks and HFCs offer different interest rates and loan terms based on their evaluation. Banks tend to have stricter eligibility requirements and potentially lower rates, while HFCs are generally more flexible in their eligibility requirements but offer home loans at slightly higher rates.

5. Can I negotiate the interest rate for my home loan?

Although banks and HFCs fix interest rates for home loans, there is room for negotiation based on your profile, loan amount, and credit history. Typically, if the loan size is large and your financials are strong, your chances of negotiating a better rate are high.

reyansh akshay

Seasoned content creator with a focus on Banking, Financial Services, and Insurance domains. Demonstrated success in generating engaging, sector-specific content, adept at crafting informative articles, blog posts, and marketing collateral. Proficient in industry jargon and regulatory nuances.

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