Are you on the lookout for a personal loan? 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 important 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
Banks are governed by the Banking Regulation Act, 1949; hence they have to 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 criteria are not met. However, this also ensures more secure and safe lending.
NBFCs, on the other hand, are governed by The Companies Act, 2013 and have much more flexibility with regard to the eligibility for loans. Though the RBI also regulates the NBFCs, the regulations are not as strict as those applicable to the banks. As such, NBFCs can accommodate even those applications to which the bank does not grant approval. 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, it is important to know your credit history and where you stand regarding the CIBIL score. 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.
If you are looking for funds quickly or in a very short period (i.e., for medical emergencies or investing in an IPO), NBFCs can provide quick disbursals. Banks take a longer time 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 both banks and NBFCs, banks can usually offer higher amounts of loans and for longer durations than an NBFC. Unlike NBFCs, banks do not fund 100% of the loan amount and require you to contribute some equity of your own.
Personal Loan Interest Rates
Even though NBFCs provide fast and speedy loans, the interest rate offered by them is fixed in nature 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 tenor than banks. The longer the tenor of the loan, the lower the EMI will be. On the downside, a longer tenure increases your debt burden for years to come. It is recommended to always 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.
Whether to go for a bank or an NBFC depends on your assessment of your own financial status as well as credit standing. 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 execution of loan 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, it is advisable to run a personal loan EMI calculator to understand your monthly outgo due to the personal loan.
By giving due consideration to the factors discussed, you will surely make an informed and wise decision!