Are you looking for a personal loan? Were you confused about approaching a bank or an NBFC? You’re not the only one! Making this decision is very confusing for most of us. Let’s understand the critical factors and their role in deciding which personal loan provider is best suited for different applicant profiles; before that, one should understand what differentiates a bank from an NBFC.
Bank vs. NBFC
The Banking Regulation Act of 1949 governs banks; hence, they must abide by all RBI guidelines. They have to maintain adequate reserves and follow due diligence procedures laid out by the RBI. This results in stricter personal loan eligibility criteria. The banks cannot sanction a loan if the standards are not met. However, this also ensures more secure and safe lending.
Though the RBI also regulates NBFCs, the regulations are not as strict as those applicable to banks. NBFCs, on the other hand, are governed by The Companies Act of 2013 and have much more flexibility concerning loan eligibility. As such, NBFCs can accommodate even applications that the bank does not approve. This flexibility has resulted in NBFCs witnessing a sharp increase in their share of the total percentage of personal loans in the market.
Factors that help you decide:
- Credit Rating of the Applicant
Firstly, knowing your credit history and where you stand regarding the CIBIL score is essential. Banks have strict eligibility guidelines, and applicants with a credit score of less than 750 may not be eligible for loan sanctions. For such applicants, approaching an NBFC may be the only viable option.
Processing Time
If you are looking for funds quickly or briefly (i.e., for medical emergencies or investing in an IPO), NBFCs can provide quick disbursals. Banks take longer to process the loan application, given the extensive process they need to follow before disbursing the loan.
Amount and Tenor of the Loan
For applicants who meet the eligibility criteria of banks and NBFCs, banks can usually offer higher loans for longer durations than an NBFC. Unlike NBFCs, banks do not fund 100% of the loan amount and require you to contribute some equity.
Personal Loan Interest Rates
Even though NBFCs provide speedy loans, their interest rates are fixed and usually higher than those offered by banks. Banks can offer floating rates of interest linked to the RBI rates, which NBFCs cannot.
Personal Loan Repayment Burden
NBFCs may be able to offer a longer tenure than banks. The longer the loan is tenor, the lower the EMI will be. On the downside, a longer tenure increases your debt burden for years. You should continually evaluate the EMI burden for different tenors using a personal loan EMI calculator and arrive at the best combination of EMI vs. tenor for you.
Conclusion:
Whether to go for a bank or an NBFC depends on your financial status and credit standing assessment. It also depends on the amount of loan you require, the repayment period desired, and how soon you need it.
While banks offer you lower interest rates and maybe even higher amounts over longer tenors, if speedy loan execution is your primary concern, an NBFC may be a better choice for you. NBFCs are more flexible than banks and can sanction personal loans to applicants who do not meet the bank’s eligibility criteria for credit score, etc. Under all circumstances, running a personal loan EMI calculator is advisable to understand your monthly outgo due to the personal loan.
Considering the factors discussed, you will make an informed and wise decision!
