Pros and Cons of Availing a Loan from NBFC v/s a Bank

NBFCs demand a higher share in the market for the sole reason that they provide ease in availing of loans, be it a home loan or an education loan. They act as a perfect foil to the banking system in India. In this article, Ankit Mehra, CEO & founder, Gyandhan discusses the pros and cons availing a loan from NBFC v/s a Bank.

NBFCs demand a higher share in the market for the sole reason that they provide ease in availing of loans, be it a home loan or an education loan. They act as a perfect foil to the banking system in India. With its provision to provide high-ticket unsecured loans, it may even have become the top choice for some of the customers. Granted, every institution has its pros and cons that help the customers decide on which lender to approach. Let’s study the pros and cons of availing of a loan from an NBFC v/s a bank in detail:-

Varied loan products - One of the biggest advantages of choosing an NBFC over a bank is the varied loan products they offer - from low-ticket loans to high-ticket loans, including secured and unsecured loans. The lending process is far more relaxed, and there is usually no cap on the amount an applicant can borrow without collateral.

Consequently, banks have a limit on the unsecured loan amount - INR 7.5 lakhs. Any application above this loan amount requires collateral to be pledged. The applicant needs to have a third-person guarantor for loans below INR 7 lakhs and up to INR 4 lakhs. In any case, a loan from a bank is not given solely on the basis of the applicant’s profile, which is possible with NBFCs.

Easy documentation process - The RBI regulates both banks and NBFCs. However, the ruling acts differ. Banks are ruled by the Banking Regulations Act 1949 and The Companies Act 1956 rule the way NBFCs operate. It allows NBFCs to be more lenient and offer more leeway to the customers in terms of documents, loan amount, and security pledged.

Since most loans from a bank require collateral, applicants have to submit original collateral documents as well. It makes the process quite lengthy and cumbersome. And if a document is missing, the application will take a long time to process or be rejected outrightly.

Processing time - NBFCs take considerably less time to process the loan applications. The process is even simpler with the online application system and a faster decision-making process. A loan from an NBFC can take up to a week or two to get sanctioned, even when collateral is pledged. The same loan from a bank can take up to a month or more.

CIBIL score - The CIBIL score is a 3-digit numeric summary that indicates the credit history and reflects the credit profile of the applicant. It is based on the past credit behavior - borrowing and repayment habits shared by the lending institutes on a regular basis. It can range from 300 to 900. A score of 685 and above is considered good. NBFCs generally accommodate low credit scores. Though, it does impact the interest rate offered.

Banks follow stricter norms and are hesitant to process applications with a low credit score. An application below the mentioned credit score will not be processed further.

Taking a loan from an NBFC does not guarantee a completely smooth road. Let’s take a look at a few cons of taking a loan from an NBFC -

Interest rates - The lending rate of an NBFC is not dictated by the RBI. It depends on the candidate’s profile, risk percentage, and other eligibility criteria. As a result, the interest rate can range from 11 per cent to 16 per cent.

Banks, on the other hand, do not offer interest rates based on the applicant’s profile, which is regulated by the RBI and the repo rate set by it.

Processing Fees - The processing fee is a one-time charge levied by the lender to process the application. Banks generally keep a fixed processing fee ranging anywhere from INR 2000 to INR 15,000 irrespective of the loan amount. NBFCs, on the other hand, charge 1 per cent to 2 per cent of the loan amount. If the loan amount increase, so does the processing fees and vice versa.

Tax benefits - This is particularly for education loans. Taking an education loan from a bank allows the applicants to claim interest paid on the loan as a deduction. The same is not possible in the case of an NBFC, with the only exception of the HDFC Credila.

Moratorium period - This, again, relates to education loans. Parents looking to finance their child’s education with an education loan from an NBFC will be required to pay interest amount during the study period, which is why the credit score and income of the co-applicant are essential factors during the application process.

Banks, on the other hand, offer a moratorium period to the applicants with the interest being accounted for with the EMIs that start after the study period plus the grace period ends.

Every lending institution has its pros and cons, and therefore, borrowers should do their due diligence before applying for a loan.