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If this is the first time you are applying for a home loan, then you might be struggling to choose between a bank or an HFC (Housing Finance Company) due to the impact your decision can have on your home loan. All the critical aspects of the loan, including the interest rate, eligibility, loan amount, tenure, and repayment flexibility, are directly linked to the lender you choose.Thus, between bank vs HFC , what should you select? Is one better than the other? To help you decide, we’ll compare banks and HFCs based on factors most vital to the borrowers. Take a look-
1. Interest Rate Calculation
- Banks Banks calculate the interest rate based on the RBI-regulated MCLR (Marginal Cost Of Funds Based Lending Rate) method. The RBI decides the base rate to which banks add their spread. For instance, if the base rate is 7%, a bank might add a 0.5% spread and offer home loans at 7.5% interest.Due to external factors, banks don’t have a lot of room to go beyond the base rate. As a result, home loans from banks are generally cheaper than HFCs. Banks are also faster when it comes to passing the RBI’s rate cuts to the customers.
- HFCs HFCs follow the PLR (Prime Lending Rate) method, which is not regulated by the RBI. To the PLR, HFCs add a discount to finalize the interest rate. For instance, if the PLR is 14%, an HFC can add a discount of 5% and offer home loans at 9%.HFCs are free to choose their discount as per customer demands. Due to this, their interest rates are generally higher than banks. However, you can find leading HFCs that offer housing loans at highly competitive rates.
2. Loan Approval and Documentation
- Banks Another vital bank vs HFC difference is their loan approval and documentation process. As the RBI closely regulates banks, their documentation and approval process are more stringent than HFCs.If you don't meet the bank's eligibility criteria or some of the documents are missing, or your credit score is below 750, then it can be challenging to get your home loan application approved by a bank.
- HFCs Housing finance companies are generally more lenient regarding documentation and loan approval. The eligibility criteria are flexible, and the documentation process is also more relaxed, making them an ideal choice for self-employed people and small businessmen.Even their credit score parameters and models are different from the banks. As a result, plenty of borrowers who get rejected by banks approach top HFCs to get their home loans approved.
3. Loan Amount
- Banks As banks have stringent eligibility requirements, the maximum amount a borrower is eligible for is closely linked to their monthly income and other factors.In most cases, banks do not add the stamp duty and registration charges to the loan amount. Thus, apart from the down payment, borrowers must pay the stamp duty and registration charges from their pockets.
- HFCs As the eligibility criteria are more lenient, borrowers can get approved for a higher loan amount from an HFC.Also, HFCs often add the stamp duty and registration charges to the cost of the property to ensure that the borrowers don’t have to pay these significant expenses from their pockets.
4. Overdraft Facility
- Banks Most top banks offer an overdraft facility to home loan borrowers. With this feature, borrowers can park their surplus funds in the loan account to repay the loan faster and reduce the overall interest they pay over the loan tenure.If required, then they can also withdraw funds from this overdraft account.
- HFCs HFCs generally do not offer an overdraft facility.
Banks vs HFC: An Overview
Here’s a quick overview of some of the biggest bank vs HFC differences-
| Parameters | Banks | HFCs |
| Interest Calculation Methodology | MCLR | PLR |
| Interest Rate | Lower | Higher |
| Passing RBI’s Rate Cuts | Faster | Slower |
| Eligibility Requirements & Documentation | Stringent | More lenient |
| Credit Score Requirements | Above 750 | More flexible |
| Loan Amount | Closely linked to borrower’s eligibility | Higher probability of getting approved for a bigger loan amount |
| Stamp Duty and Registration Charges | Generally, not included in the loan amount | Often included in the loan amount |
| Overdraft Facility | Yes | No |
What Should You Choose Between Banks and HFCs?
Top HFCs in the country have significantly improved their loan offerings in the last few years. They can be ideal for any borrower looking for a lender with flexible eligibility requirements. However, if you already have a long-standing relationship with a bank and fulfil their stringent eligibility criteria, then you can consider the same bank for your home loan .Whether you go with a bank or HFC, ensure that you choose a trusted lender with vast industry experience to fulfil your dream of being a homeowner in the most convenient and hassle-free manner.
DISCLAIMER
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
