Bank or NBFCs! Which one is best for the Loan and when to shop

At the time of urgent financial need, everyone looks for the places or people that can give them money. It includes family, friends, your Employer and also loan providers. Banks and NBFCs both provides loan, but it’s important to understand that which one is better to get a loan.

A person can take loan from Bank or NBFC, but there are few differences between Bank Loans and NBFC Loans. Brief knowledge about these differences can help you to select the better option for your loan.

Banks and NBFCs both are the financial entities and offers similar financial products. Because they offer same products and services, it’s quite tough for a Loan applicant to select the better one and they always think about which one would be best for their need, Bank or NBFC. Banknomics India did a brief comparison between the services and products of Banks and NBFCs and trying to provide a complete description of their facilities. This will help a borrower to find out the best option while looking for a loan.

Key differences between Banks and NBFCs

Banks and Non-Banking Financial Companies in India both offer loans, credit cards, Insurances and other financial products and services.  Banks in India comes under the act of banking companies operated by the RBI while the Non-Banking Financial Companies comes under the Companies Act of 1956.

NBFC never issue cheques or drafts and they also not accept the deposits. Every bank and NBFC has their term and condition and they follow it with their financial products and services. While we talk about banks, they allow their account holders to transact money. Banks have the authority to be a part of the payment as well as the account settlement of their customers.

Best choice to approach a loan

To choose a bank or NBFC for a loan, it’s also important to keep it in your mind that which kind of loan you are looking for. Many NBFCs offer fast loan approval with easy repayment options for their loan applicants. As compare to the NBFCs, Banks have a variety of loan products such as Home Loan, Personal loan, car loan, business loan, Education loan and so many other products.

A loan applicant can get the best option for their loan on the basis of following criteria’s:

·       Credit History or CIBIL Score

·       Interest Rate

·       Loan Eligibility Criteria

·       Inflexible Process of Documentation or Paperwork

Credit History or CIBIL score:

A good CIBIL score is a major factor for loan approval. All banks and NBFCs offer loan approval on the basis applicant’s credit history. It also affects the interest rate of Loan. Banks offer the loan to the applicants which have Good credit history whether NBFCs provide some flexibilities in the CIBIL score criteria as compare to the banks; so an applicant with average CIBIL score can also get the loan from the NBFCs.

Interest rates of Loan:

It’s all about MCLR (Marginal Cost of funds based Lending Rate) and PLR (Prime Lending Rate). Bank offers loan on the MCLR interest factor. MCLR is regulated by the RBI so it’s also known as RBI Mandated lending rates.

NBFCs offer the loan on the PLR interest rate factor and it’s not regulated by the RBI. Because the Interest rate criteria on NBFCs don’t come under RBI regulation, it provides them the authority to make some flexibility in their Interest Rates and Credit history also. NBFCs offer best loan services at a low-interest rate as compared to the banks; they also offer the Loan at a high-interest rate to the applicant with poor credit History. Banks won’t allow a loan below the MCLR interest rate.

Loan Eligibility:

Loan Eligibity criteria are different for banks as well as NBFCs. Loan eligibility criteria of NBFCs are quite relaxed as compare to the Banks. NBFCs offer much more according to your eligibility. They offer a loan amount as per your repayment capacity, Credit History, and other loan factors. On other hands with Banks, the loan eligibility criteria are strict and they don’t grant the loan to the applicant with poor credit History. The repayment criteria of banks also differ from the NBFCs. 

Inflexible Process of Documentation or Paperwork:

Documentation process of banks is so inflexible. In the era of NPAs (Non-performing asset) it’s Banks responsibility to provide loan with extra care. On the other hand, the NBFCs Documentation process is easy, convenient and customer friendly. Many of NBFC offers online documentation process too.

Both bank and NBFCs have their merit and demerit about the loan process and approval. At the time of loan applying it’s important to compare and figure out the factors like type of loan, CIBIL score, Interest rate of loan, documentation and processing fees and the duration loan disbursal.