Bank Vs HFC Housing Finance Company: Which Is Better For Home Loan?

Bank Vs HFC for Home Loan Comparison

Despite what the general public believes, HFCs (housing finance companies) are subject to regulation. 

They operate under a National Housing Board (NHB) license and offer house loans in accordance with NHB regulations. 

The RBI, on the other hand, oversees the regulation of Banks. 

The decision between Bank vs HFC the two options for a home loan depends on a number of variables, including the loan payback length, processing charge, and interest rate. 

Although the loans have superficial similarities, the regulatory environments of banks and HFCs differ, giving the loans unique characteristics.

Here are components for comparing Bank Vs HFC.

Calculation of Interest Rate

For Bank

The RBI regulates the Marginal Cost of Funds Based Lending Rate (MCLR) system, which banks use to determine interest rates. 

The base rate, towards which banks add their spread, is determined by the RBI. For instance, a bank may add a 0.5% difference and sell mortgages at 7.5% interest if the benchmark rate is 7%.

Banks don’t have much room to increase interest rates over the base rate because of outside variables. 

Home loans from bank institutions are hence typically more affordable than HFCs. Whenever it pertains to handing on the RBI’s rate decreases to the public, banks move even more quickly.

For HFCs

The PLR (Prime Lending Rate) approach is used by HFCs and is not governed by the RBI. 

To complete the interest rate, HFCs apply a discount to the PLR. 

An HFC might add a 5% discount and provide house loans for 9%, for example, if the Prime Leading Rate is 14%.

HFCs can select their discount based on client preferences. As a result, they typically charge greater interest rates than banks. 

Leading HFCs do, however, provide housing loans at incredibly low rates.

Documentation and Loan Approval Process

For Bank

The loan approval & documentation procedures between banks vs HFCs are a significant area of contrast. 

Since the RBI closely controls banks, they must adhere to stricter documentation and approval requirements than HFCs.

It may be difficult to get your house loan application accepted by a bank if you don’t satisfy the requirements set forth by the lender, certain required documents are missing, your credit score is less than 750, or any of these factors apply.

For HFCs

HFCs are typically more forgiving when it comes to loan acceptance and documentation. 

For independent contractors and small business owners, they are the perfect option because the eligibility requirements are broad and the documentation procedure is considerably more lenient.

Even individual credit score methodologies and parameters differ from those used by banks. Many borrowers who are turned down by banks turn to reputable HFCs to obtain their house loans authorised as a result.

Overdraft Facility

For Bank

Home loan applicants can get an overdraft from the majority of reputable institutions. 

With the help of this function, homebuyers can park their extra cash in the loan account, which will help them pay off the loan more quickly and pay less interest overall.

They may also take money out of this overdraft account if necessary.

For HFCs

Typically, HFCs do not provide overdraft facilities.

Loan Amount

For Bank

The upper limit a borrower is authorized for is highly related to their monthly salary and other circumstances because banks have strict eligibility standards.

The majority of the time, banks do not increase the loan amount to include the stamp duty & registration fees. 

Therefore, in addition to the deposit, borrowers are responsible for covering their own costs for stamp duty & registration fees.

For HFCs 

Home loan borrowers can be authorised for a larger loan amount via an HFC because the eligibility requirements are more relaxed.

To prevent the borrowers from having to pay these large costs out of their own pockets, HFCs frequently include the stamp duty & registration fees in the price of the property.

Why Select Bank?

Advantages Of Selecting Bank

• Banks are required to adhere to the RBI’s guidelines and use a lending rate based on the MCLR marginal cost of funds. This implies that they must logically connect home mortgages to the marginal price of all of their borrowings. 
• Banks, as opposed to HFCs, where these rates are tied to the standard prime lending rate, pass on interest rate fluctuations to borrowers more quickly for this precise reason.
• One such service is an overdraft, which enables customers to quickly pay back their loans in the event of excess cash. 
• A home loan typically entails a significant financial commitment, with the interest paid by the borrower eventually exceeding the initial sum. By treating the surplus in the borrower’s bank account like a prepayment for the mortgage, an overdraft facility reduces interest rates.

Disadvantages Of Selecting a Bank

• The bank’s documentation requirements are fairly strict, thus processing an application may take longer time as a result. 
• Furthermore, it could be difficult for you to get a home loan if your credit score is low. 
• A loan from an HFC might be a better choice in these circumstances.

Why Select Housing Finance Company HFCs?

Advantages Of Selecting HFCs

• When it concerns providing services to borrowers, HFCs are subject to well-regulations. HFCs frequently have more flexibility in how they determine income, allowing you to obtain a larger loan amount than what banks normally provide.
• HFCs are less strict about having a solid credit score than banks are, in comparison.
• HFCs use their own criteria to assess your creditworthiness while also taking into consideration real-world reasons for your poor credit score.
• The home loan documentation process is simpler in HFCs as compared to Banks. 

Disadvantages of Selecting HFCs

As compared to banks the rate of interest in HFCs is relatively higher. 

How To Decide Between Bank Vs HFC 

Deciding between Bank Vs HFC is a tough decision a home loan borrower has to make. Here is some points to help in deciding between these two lenders.

• Take into account the loan’s interest rate. Your chances of getting a house loan at a significantly lower interest rate increase if your credit score is 750 or higher.
• The procedure of obtaining a house loan from a housing finance company will be easier and faster if an individual is a self-employed professional.
• HFCs are a preferable option for borrowers who require a quick disbursement of funds. The bank is the preferable choice if you also need a home loan and banking services.

Points To Consider Before Choosing Bank vs HFC

Here are a few important points to keep in mind before choosing Bank vs HFC

• The benefits of the RBI’s rate drop are being transferred by banks more quickly. HFCs are an exception to this rule.
• In the case of HFCs, the interest rate will always be higher.
• HFCs are less stringent about documentation requirements than banks are. It follows that self-employed individuals will find it simpler to get a loan via HFCs.

Also, Read Home Loan From NBFC Vs Banks Comparison

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