Many people turn to banks or NBFCs for support to buy their first home. Earlier, it was just banks, but now non-banking financial companies (NBFCs) are also offering strong opportunities. They give loans with flexible terms and faster processing. It can be very confusing to choose between a home loan from an NBFC vs a bank.
This blog explains the key differences between banks and NBFCs for home loans, covering rates, eligibility, processing and service, to help you choose the right lender.
What are housing loans?
A housing loan is a financial product offered by banks or housing finance companies to help you purchase, construct, renovate or rebuild a home. You can use it to buy a new or resale property, build a house on your land or expand your existing home.
Types of housing loans
There are different types of housing loans based on your needs, they are:
- Home purchase loan: Taken to buy a new or pre-owned residential property.
- Home construction loan: Used to fund the construction of a house on your land.
- Home renovation loan: It helps you pay for repairs, upgrades or home improvements.
- Land purchase loan: Offered to buy a residential plot for future home construction.
- Balance transfer loan: This loan lets you transfer your current home loan to another lender for better interest rates or terms.
Key differences between banks and NBFCs
When choosing a home loan from NBFC vs bank, differences in regulation, rates, eligibility and processing make each better suited to different borrower profiles. Here’s a breakdown:
Banks operate under the direct supervision of the Reserve Bank of India (RBI) and follow the guidelines set by the Banking Regulation Act. NBFCs, while also regulated by the RBI, function under the Companies Act and the RBI Act, giving them a different operational framework.
Banks offer home loans linked to the RBI’s repo rate, which means their interest rates fluctuate with market movements. In contrast, NBFCs determine their rates based on their internal Prime Lending Rate (PLR), giving them more flexibility in pricing loans.
Banks assess your credit score, income stability, job type and existing debt before approving a loan. NBFCs, however, are more flexible and may approve loans even with lower credit scores or irregular income.
Home loan processing at banks typically takes longer due to detailed verification and more paperwork. NBFCs are known for faster loan approvals and simplified documentation.
Both banks and NBFCs offer home loans with long repayment tenures, often up to 30 years. NBFCs may offer higher loan amounts, especially if the property value is high or if the borrower falls just short of a bank’s eligibility norms.
Banks often encourage or require borrowers to purchase home insurance from their partnered providers. NBFCs may also suggest insurers, but generally offer more flexibility, allowing borrowers to choose from a wider range of insurance providers.
NBFCs are typically recognised for offering personalised service, quicker response times and greater convenience. In comparison, banks, especially public sector institutions, may have slower service due to higher customer volumes and rigid processes.
How to choose the right option for your home loan
Here’s a quick guide to help you choose the right lender. Opt for a bank if you have a good credit score, meet strict eligibility criteria, want lower interest rates linked to RBI benchmarks like the repo rate or MCLR and prefer a well-regulated institution with lower processing fees.
Choose an NBFC if your credit score is low, your income is irregular (e.g., self-employed) or you need faster approval, simpler documentation, flexible loan terms and more personalised service.
Role of home insurance while getting home loans
House insurance is an important part of obtaining a home loan from a bank or NBFC. While not legally mandatory, lenders often require it to protect the property against risks such as fire, theft or natural disasters. It offers financial security and may also help speed up the loan approval process.
Conclusion
Choosing between an NBFC vs bank home loan depends on your financial profile and specific needs. Banks offer stronger regulatory oversight and usually lower interest rates, while NBFCs provide quicker approvals, easier documentation and broader reach in rural and semi-urban areas.
As part of the loan process, lenders often require home insurance to protect the property against risks like fire or natural disasters. Ultimately, the right choice should align with your budget, repayment capacity and long-term financial goals.
FAQs
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Which is a better option for a home loan – a bank or an NBFC?
It varies with your credit score, type of income and the urgency of needing the loan. Banks offer lower rates of interest, whereas NBFCs offer fast and flexible terms.
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Is home insurance mandatory for taking a home loan?
Requiring house insurance during the loan period is a good practice because it protects the property against risks like fire or natural disasters.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It may contain outdated data and information regarding the topic featured in the article. It is advised to verify the currency and relevance of the data and information before taking any major steps. ICICI Lombard is not liable for any inaccuracies or consequences resulting from the use of this outdated information.