Which is the Best Place to Get Home Loan - Bank or Housing Finance Companies?

HOUSING | Tips & Advice 17 November 2021

Planning to buy that dream home? A home loan is the next thought that comes to one’s mind, and the obvious big question is where to take the home loan from. It is crucial to choose the right type of lender according to one’s requirements. There are two options where one can borrow from:

Which is the Best Place to Get Home Loan - Bank or Housing Finance Companies?
  • Banks – under Reserve Bank of India (RBI) regulations.
  • Housing finance company (HFC) - specialized non-banking housing finance companies regulated by the National Housing Bank (NHB). 

Though both the bank and HFC home loans seem similar, they differ significantly due to different regulatory environments and fund sources. They both have their pros and cons. Thus, the borrower must make an informed choice based on these pros and cons and other vital factors such as interest rates, ease of borrowing, eligibility criteria, etc. 

Home loan from Bank- Pros and Cons.

The Advantages/Pros:

  • Banks pass on the interest rate changes faster to borrowers as they follow the marginal cost of funds-based lending rate (MCLR) model of RBI.
  • Banks have an overdraft facility that enables savings on the interest payments made by the borrowers.
  • Banks prefer high credit scores and offer attractive interest rates on the loans. 

The Disadvantages/ Cons

  • Banks follow a complex and stringent process of documentation.
  • Loan Sanction takes a lot of time and is tedious.
  • Loans are usually not available for people with low credit scores, i.e., below 750.
  • The loan amount sanctioned does not include stamp duty and registration costs while approving the home loan on a property value. 

Home loan from Housing Finance Company (HFC) - Pros and Cons.

The Advantages/Pros:

  • While sanctioning a home loan, an HFC includes stamp duty and registration costs as part of the property's market valuation - thus the borrower receives a higher loan amount.
  • HFCs are comparatively less stringent about credit scores. Their higher interest rates make them flexible towards loan applicants having lower credit scores, even with a credit score of less than 750.
  • HFC's credit scoring model allows borrowers from the low income or informal segments, usually without any credit history, to take home loans.  
  • Documentation is hassle-free, and turnaround time is fast. 

The Disadvantages/ Cons

  • Interest rates on home loans can be high. 
  • HFC's may be slower in passing interest rate cuts to the borrowers as their lending rates are based against the benchmark prime lending rate (BPLR).
  • HFCs do not offer an overdraft facility.

A comparison between Bank Home Loan vs. HFC Home Loan

Criteria Bank home loan HFC home loan
Regulated by RBI-Reserve Bank Of India National Housing Bank (NHB)
Documentation Stringent Hassle-free
Rate of Interest Comparatively less than HFC Comparatively higher than Banks
Facility of Overdraft Available Not available
Benefits in interest rates Passed faster as compared to HFC Passed slower as compared to banks
Loans for lower-income group/ Informal segments Not available Available

How to Make a Choice

The borrower should carefully evaluate the actual loan requirements to make the right decision while selecting a lender, and also the following criteria are worth considering:

  • Banks don't include stamp duty and registration costs while sanctioning home loans on a property value, but HFC does.
  • HFCs are flexible in approving home loan applications, offering variable loan periods, loans to the lower-income group, competitive interest rates and hassle-free documentation with fast loan disbursement. An HFC like Piramal Capital & Housing Finance works well in doing this.

[Also Read: 10 Tips for Best Home Loan Experience]

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