When buying a house,
we all want to get the best deal on the home loan we avail as it is probably
the longest financial commitment we will make impacting our overall portfolio
and expenses. However, deciding on the right financial institution to avail the
loan from is a rather tricky task, given the market is competitive.
With the rise of
non-banking financial corporations (NBFCs) in India, the choice has only gotten
wider as customers can now choose not only among banks, but also NBFCs. But did
you know that availing a home loan from a bank and an NBFC may seem similar,
but work in very different ways?
Banks and NBFCs follow
different guidelines when it comes to lending and, thus, home loans disbursed
by them are also done on certain different parameters. Find out how these two
differ when it comes to assessing an individual for a home loan and which one
can you resort to for your home loan.
1. Interest Rates: MCLR vs PLR
Banks operate their
housing loan interest rates based on Marginal Cost of Lending Rate (MCLR),
which serves as their lending benchmark and is closely monitored by the RBI. On the other hand, loans by Housing Finance Companies
(HFCs) and NBFCs are not linked to the MCLR. They are linked to the Prime
Lending Rate (PLR), which is outside the ambit of the RBI. So while banks can’t
lend at rates below the MCLR, PLR-linked loans do not have such restrictions.
Banks have both
floating and fixed rates, of which before only floating rates felt the
occasional impact of MCLR. But in February this year it was announced by the
RBI that all new loans whether with floating interest rates or base rates will
be linked to the MCLR.
An MCLR-linked loan
clearly mentions the intervals at which its interest rate will automatically
change. In a falling interest rate scenario, this allows customers to receive
RBI-mandated rate cuts in a transparent, time-bound manner.
As NBFCs and HFCs are
free to set their PLR, it gives them greater freedom to increase or decrease
their loan rates as per their selling requirements. This sometimes suits
customers and provides them more options, especially when they fail to meet the
loan eligibility criteria of banks. But in many cases, for those who easily
meet the criteria this may also result in inflated interest rates compared to
banks.
2. Loan Eligibility via Credit Score
As paperless financial
technology takes prominence, more and more lenders are depending on credit
scores to determine loan eligibility. While there are upper caps set on
interest rates through MCLR and PLR, the actual interest rate you pay on your
loan is linked to your credit score. Leading lenders are known to offer their
best rates to customers with a CIBIL score of 750 or more.
While both banks and
NBFCs consider credit scores carefully, NBFCs tend to have more relaxed
policies towards customers with low credit scores. However, with a very low
score, both banks and NBFCs will likely charge you a higher interest rate. In
some cases, banks may ask to convert the home loan into a secured loan by
mortgaging some asset if the credit criteria is not met, but you still need the
loan.
A customer with a low
score can in fact start with a loan from an NBFC. Through timely repayment,
s/he can improve his credit score. After this, once the bank’s eligibility
criteria is met, the loan balance can be transferred to a bank.
To keep yourself
ready, make sure to access credit reports by CIBIL or Experian. This will allow
you to be ready even before you approach a lender. Since credit scores change
every quarter, you can take your time to improve it before you decide to avail
the loan in order to get a better rate of interest and disbursal amount.
Major
Difference in Home Loans Between Banks and NBFCs
Features
|
Banks
|
NBFCs
|
Eligibility Criteria
|
Stringent with detailed
checks
|
Easier and faster
|
Interest Rate Benchmark
|
MCLR
|
PLR-Spread
|
Passing interest rate benefit
to borrowers
|
Not much room for existing
borrowers
|
High chance for existing and
new borrowers to benefit from discounts
|
Interest Rates
|
Rate of interest will be
comparatively lower
|
Mostly higher than banks but
depend on the property and applicant
|
3. Loan Amount
The actual cost of
property is never just the selling price promoted by developers and builders.
During acquisition it typically goes up as other costs like stamp duty,
registration, an assortment of payments towards brokerage, furnishing, repairs
and more always add up. Based on where you are in India, you may have to pay
between 3 and 11 per cent of the property value as registration cost alone.
Banks are allowed to
fund up to 80% of a property’s value. For example, if you are buying a property
worth Rs 50 lakh, you may receive a loan of Rs 40 lakh from banks excluding the
registration cost and associated charges of course. The rest of the fund
requirements would have to be met by you and often these last mile costs weigh
heavily on the final decision to buy a property.
Although both NBFCs
and banks are not allowed to fund stamp duty and registration costs, NBFCs can
include these costs as part of a property’s market valuation. This allows the
customer to borrow a larger amount as per his eligibility.
4. Pre-Payment, Foreclosure and Late Payment Charges
Just like other loans,
home loans also have associated charges attached. Both banks and NBFCs will
have charges for pre-payment and foreclosure but NBFCs tend to charge much
higher. In addition, late payment charges by NBFCs may sometimes be close to 10
or 20% of your monthly EMI, giving you no respite in case you default on any
payment. NBFCs also tend to have higher processing fees, although some banks
may charge similar amounts.
Whoever the lender may
be, make sure to calculate you future interests and factor in additional costs
associated with your repayment as home loans range between 10 and 30 years and
you may have to bear such high charges in future.
(The writer is CEO at Bankbazaar.com)
.jpeg)