Which one to choose? A bank or housing finance company for home loan

Planning to buy a home entails a long list of decision-making, from the type and size of the house to the color of the walls. Moreover, if you are financing your home, choosing a lender gets added to this list of decision-making.

When selecting multiple lenders, a common question asked by a new home buyer is whether to apply for a home loan from a bank or a home finance company (HFC). It is crucial to choose a lender according to your requirements. Making informed choices based on interest rates, cost, eligibility criteria, ease of borrowing, and other factors can help decide.

In the union budget of 2019-20, the central government handed over the charge of HFCs to the RBI, taking it away from the National Housing Bank (NHB). After a crisis involving a non-finance banking institution started to grow, this move came in.

Home Loan from HFCs

A Home Finance company is a non-banking financial institution specialising in home loans. Their products include only home loans and their allied instruments. The eligibility criteria of the HFC are less stringent than the banks. They allow flexibility in credit score, repayment period, income criteria, etc. For example, if you do not have a credit score of 750 or above, the HFCs will give you loans, unlike banks which require the above credit score (minimum) to sanction the same. The loan processing time is also less for HFCs. The bank usually takes at least 5-7 working days to sanction the loan amount; meanwhile, HFCs take a maximum time of above 72 hours to approve the same.

The interest rate of the HFCs is pinned to the prime lending rates, which may be higher than the bank rates at times. Even the processing fee and penalty can be higher than the banks. Since the interest rates depend on the prime lending rates and not repo rates, the borrowers may not enjoy the benefits from the fall in repo rates.

Home Loan From Banks

Banks provide all kinds of loans like home loans, property loans, gold loans, car loans, etc. After October 2019, all the floating rates home loans need to be linked to the RBI repo rate benchmark. So, if the underlying basis of the bank home loan is the repo rate, then the borrowers would be able to see a proportional change in the (home loan) interest rate with regards to changes in the key policy rate.

This loan regime aims to enable rate cut benefits to the borrowers. However, if there is a hike in the repo rate, then the monthly EMI of the borrower will also increase. Banks also offer home loans with various options like a home loan with an overdraft facility, step-up or step-down EMI option, flexible repayment options, etc. However, the banks may take a substantial processing time for loan approval unless the loans are pre-approved.

There is a long list of criteria while applying for home loans from the banks. If you have a low credit score, then banks can charge a high-risk premium, which will increase the borrowers’ rate of interest for the borrowers. Also, lower interest rates are offered for women applicants and co-applicants with higher credit scores.

How To Decide?

Evaluating the actual loan requirements to make the right decision is highly applicable in selecting a lender. If you can wait longer for processing the loan and have a good enough credit score of more than 750, then a bank loan is the way to go. But suppose you are falling short of eligibility criteria or prefer a short processing time.

In that case, HFC is your best option. However, interest rates are higher with HFCs. Nevertheless, you can always switch to another lender if you are dissatisfied with your current lender, though it is advised to cautiously select a lender that meets your requirements to avoid switching costs and other hardships.