A person who wishes to buy a home often seeks help from banks, as they were the only financial institutions that availed themselves of such loans earlier. Lately, though, the Non-Banking Financial Companies (NBFCs) have really come up as viable options, presenting attractive alternatives against the usual banking solutions. In this blog, we will delve into the key differences between banks and NBFCs in the context of home loans, helping you make an informed decision about which option might be better suited to your needs.
Banks: The Primary Choice
For many years, banks have been the preferred choice for individuals seeking home loans due to their established credibility and longstanding presence in the financial sector. Banks provide many benefits to home loan seekers, such as a wide variety of loan options and strict regulatory supervision by central banking authorities. Despite the fact that banks have traditionally been a sound and stable source for home loans, it is advantageous to also examine the changing lending landscape. NBFCs have also emerged as stiff competitors, thus providing alternative solutions for home loan seekers. The offerings of NBFCs can be explored for borrowers to have more options that might suit their needs better.
Non-Banking Financial Companies (NBFCs): The New Alternative In the last few years, Non-Banking Financial Companies (NBFCs) have emerged as a major player in the financial sector, characterized by stability and reliability. In the case of home loans, there are several advantages that NBFCs offer, making them a preferred choice for many borrowers:
Flexibility and Innovation: NBFCs usually offer more relaxed credit policies than regular banks. They tend to be more accommodating of different sources of income, therefore individuals being self-employed or earning in a non-conventional means find it easier to qualify for a home loan.
Quick Approvals: In many instances, NBFCs provide relatively faster loan approval compared to banks. This may also be an important reason in highly competitive real estate markets where speed would be essential for securing the deal before others.
Customized loan products: the NBFCs often offer customized loan solutions which are customized as per the need of their clients. These comprise different types of home loans including construction loans, renovation loans, and home purchase loans that allow a borrower to avail of a loan that meets the exact requirements of the borrower.
Wider Accessibility: With an increasing footprint in semi-urban and rural regions, NBFCs provide wider accessibility for people to get financial services, which are inaccessible or may not be found conveniently for all individuals.
These benefits explain why several borrowers opt for home loans from NBFCs to benefit from flexibility, speed, customization, and accessibility they offer.
Considering the Foregoing Factors While Choosing a Bank vs. NBFC
Loan Terms: Compare loan terms offered by banks and NBFCs, including payback periods and prepayment flexibility. Choose the option that best supports your long-term financial objectives.
Customer Service: Compare the customer service of the lender. Quality customer service and support can be a huge difference maker in your experience of borrowing money.
Eligibility Criterion: Analyse the eligibility norms defined by both the banks and the NBFC. If your credit history or other income source is abnormal, an NBFC will tend to provide greater ease of getting sanction on a loan application.
Unique Sources of Income: These include income streams that are not very conventional, such as a regular salary from a job, but contribute to your financial stability and repayment capacity. NBFCs, with more flexible policies, are often more accommodating of such income sources based on their risk assessment. Examples include:
Freelancing or Gig Economy Income: Earnings from freelancing, consulting, or gig economy work, where payment is received for individual tasks or projects rather than a fixed salary.
Rental Income: Revenue from properties you own and lease to tenants, including residential, commercial, or vacation rentals.
Investment Income: Profits from investments like dividends from stocks, interest from bonds, or capital gains from selling assets like real estate or stocks.
Royalties: Payments for the use of intellectual property, such as patents, copyrights, or trademarks.
Side Business Income: Earnings from a small business or side project operated alongside a regular job.
Pension: Regular payments received upon retirement from an employer or government-sponsored pension plans.
These income sources can vary in stability and predictability. When applying for loans, especially from NBFCs, having a mix of these unique income sources can demonstrate your ability to repay the loan even without a traditional job with a fixed salary.
However, acceptance of these income sources may vary from lender to lender. Some may view them favorably, while others may have more stringent criteria or policies. It is always wise to check with the lender for their acceptance of unique income sources before applying for a loan.
The Role of Non-Banking Financial Companies (NBFCs) in India’s Financial Landscape
Non-Banking Financial Companies (NBFCs) are the ones that help in financial inclusion in India. They provide credit access to both the essential and niche segments of the Indian economy, which include infrastructure projects and underserved societal segments. Through resource allocation and offering loans at reasonable rates, NBFCs significantly enhance the reach of the Indian financial sector.
In contrast, compared to conventional banks, NBFCs fill the gaps for various customer types as they function in relatively flexible lending protocols. Decisions are fast, documents needed are fewer, and services are delivered on time. Hence, a significant section of customers favors such banks. Also, initiatives from the government in the form of ‘Make in India’ have boosted growth in the manufacturing sector. Subsequently, demand for credit by heavy industries increased. This also involves the MSME sector, with high credit needs, that is increasingly approaching NBFCs for funding solutions.
Conclusion
The choice between a home loan from a bank or an NBFC depends upon the individual’s circumstances and preference. Both banks and NBFCs have unique advantages and considerations. Banks are known for stability and regulatory oversight, while NBFCs are recognized for their innovation and flexibility, offering benefits like fast approvals, minimal documentation, competitive interest rates, and a strong presence in semi-urban and rural areas.
You must make the choice that will be suitable depending on your financial status, long-term goals, and comfort level with the lending institution. After a lot of consideration, study, and comparing of terms, interest rates and customer experiences between banks and NBFCs, one has to take the final call, which will be in line with your larger aspirations for the future and provide a strong and comfortable foundation for your journey as a homeowner.
