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Banks or NBFCs: Who should you take a loan from?

When shopping for a loan, you usually have two choices. You can head to a bank. Or you can approach a non-banking financial company (NBFC). Both entities lend money for various needs. But there are key differences between their loans. Should you take a loan from a bank or an NBFC? Which one would be best for you? Read on to know the differences between the two.

Banks and NBFCs: What’s the difference?

Both banks and NBFCs offer financial services to their customers. The Reserve Bank of India (RBI) regulates banks. NBFCs come under the Companies’ Act of 1956. Banks allow their customers to send and receive money. NBFCs cannot issue cheques or drafts. They also cannot accept deposits. Both lending entities have specific terms and conditions for their loans.

Should you choose a bank or an NBFC for a loan?

You may be in a dilemma over whether to choose a bank or an NBFC. Both entities have their own advantages and disadvantages. For instance, NBFCs process loans quickly. They also have easy repayment structures. Banks have more stringent loan processes. But they may also have more loan types than NBFCs. Take a look at the factors that separate the two.

1. Credit score eligibility

Banks and NBFCs offer attractive interest rates for customers with good credit scores. But NBFCs may approve loans for customers with low CIBIL scores too. NBFCs are more flexible when it comes to credit score eligibility.

2. Interest rates

Banks can only lend as per the RBI-mandated lending rates. Floating rates change based on market conditions. But NBFCs lend based on prime lending rates. These rates do not come under RBI regulations. So, NBFCs can increase or decrease their rates at their discretion. In this way, you could gain from special deals by NBFCs. You can use their low-interest offers to your advantage. 

3. Eligibility criteria

There is a marked difference in the way banks and NBFCs view eligibility criteria. NBFCs are more flexible about loan eligibility. They look at your repayment capacity or credit score. For instance, on a car loan, banks may fund only 80% of the price. There may be extra charges for registration and stamp costs. NBFCs usually incorporate all costs. In this way, you are able to take a larger loan.

4. Documentation and processing

Banks are more stringent with the processing of loans. They have strict paperwork requirements. NBFCs are more relaxed in this regard. This makes loan processing with NBFCs quicker. So, if you need a loan faster, head to an NBFC.

Which is better?

Do not opt for a loan from an NBFC or bank without doing your homework. Keep in mind the type of loan and loan charges. Look at the processing time and interest rates as well. Also factor in your credit score. Once you have all the details, choose whichever option seems more suitable.