Wednesday, 23 August 2017

HFC Vs Bank: Where To Get That Home Loan from?

Every Indian family dreams to own a house of its own. If you have already selected the house of your choice, the next logical step is to find a lender who will provide the necessary funds needed for the purchase. If the project of your choice is approved by both banks and housing finance companies, then you need to decide which one to go for.

Since banks have been the traditional source for home loans they account for the maximum share of housing finance market. Banks are governed by RBI. HFC are new entrants in the market who are also playing a significant role in this space. HFCs are regulated by National Housing Bank who makes sure that they follow the standard industry practices. With so many choices of financial institutions how does one decide which one to choose? Since housing loan is a long term commitment that impacts your finances in a big way, one needs to be doubly sure before taking a final decision.

Since the interest rate, processing fee, loan amount sanctioned and the eligibility criteria are the key deciding factors; lets evaluate how the banks and HFC score on these parameters.

Interest Rates

Bank home loan interest rate is based on MCLR which is linked to macroeconomic factors like the RBI lending rates. HFCs on the other hand determine interest rates according to the Benchmark Prime Lending Rate which is not governed by RBI. This gives HFC greater flexibility in fixing interest rates. They can give low interest loans to credit worthy borrowers or high interest loans for low CIBIL score borrowers. The disadvantage with Prime lending rate based model is that HFC may be slow in passing the benefits of interest rate cuts to customers. While banks are quick in passing on rate cut benefits to their customers so they mostly offer better interest rates than HFC.

Earlier the HFC home loan interest rates were usually more than the banks. But since the last decade they are offering loans at interest rates comparable to banks. Since interest rate influences your EMI it becomes the prime deciding factor. So shop around and choose the most competitive one.

Eligibility

Both banks and HFC offer attractive interest rates to people with a high CIBIL score. If you have a low CIBIL score you may not even stand a chance of getting approved by the bank. Banks have very stringent eligibility requirements and they do not sanction loans to high risk individuals. HFC are flexible while evaluating CIBIL scores. They offer loans for low CIBIL score though they balance their risks by charging higher interest rates.

Loan Amount

Banks are permitted to fund only 80% of the property cost. Moreover they do not factor in costs like stamp duty and registration charges while determining the property value. So one needs to spend a huge amount from one’s own pocket. If an individual is not able to arrange for this down payment he cannot get his house funded by the bank. HFCs on the other hand have a high loan to value ratio. They can devise ways to enable the borrower to take on a larger loan amount and contribute less from his own pocket.

Processing charges & processing time
The time taken to process the loan and the processing fee charged for the same also determine which option to choose. Usually banks are more stringent when it comes to eligibility criteria, requirements and paper work; and hence take more time to disburse funds. HFC have a relaxed paperwork and processing requirement. This enables an easy approval process and a quick disbursal of funds. People who are in immediate need of funds very often choose a HFC because of its quick processing even if the interest rates are comparatively higher than the bank.

While selecting between a bank and HFC the decision may come to who offers a better interest rate. If the interest rates are comparable one may choose the option that provides faster loan disbursal and low processing fee. Choose HFC over banks when you need a high loan amount and you cannot make a big down payment or in case of loans for low CIBIL score

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