Banks Vs HFC: Which is better for you?


In addition to many industries, the pandemic also hit the banking and financial institutions sector. The rise in non-performing assets led many banks to consolidate. Interest rates also rose for loans. Similarly, the financial health of NBCs and Housing Finance Companies (HFCs) also took a hit. To help both sectors stay afloat during these liquidity crises, the government implemented special schemes. Today, the economy is gradually improving.

Both types of companies are offering multiple home loan policies, discounts and offers to attract customers. As a homebuyer, the main question is which is more suitable for you?

As we explore different factors in this article, we will help you decide which option is best for you when applying for a home loan.

Which is better: Banks vs HFC?

Following are some questions that will help you decide between a bank and an HFC:

  • Are you knowledgeable about the interest rates?

One of the primary factors to consider when applying for a home loan is interest rates. Now, banks must link their floating interest rates with the repo rate of the government. This means their interest rates are linked to the Marginal cost of lending rate (MCLR). It is a government initiative to transfer the advantages of lower interest rates to borrowers. Thus, as government reduces the rates, the benefit gets transferred immediately to the borrowers.

However, with HFC, they do not have to do the same. Therefore, their Prime Lending Rate (PLR) is directly linked to their cost of funds. Additionally, HFCs can’t accept retail deposits from the public for their capital requirement, which makes their cost of funds expensive. Also, since they are not linked to the government rates, the benefit of lower interest rates doesn’t get transferred to the borrowers immediately. So, if you’re seeking favourable interest rates, banks are the better choice than HFCs.

  • How soon do you need the loan?
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To process a loan, banks have to comply with several regulations as prescribed by the RBI. As a result, the entire process from application to approval is time-consuming. In addition to longer processing times, banks also require extensive documentation. HFCs, on the other hand, offer less time-consuming and hassle-free home loans.

  • Is your credit score favourable?

Credit scores are used to determine the creditworthiness of borrowers. Before sanctioning a loan, lenders check the borrower’s CIBIL score. Poor repayment history can lower your credit score, and cause your home loan application to be rejected as well. Banks require a higher credit score and are more stringent in this regard than HFCs. The overall eligibility requirements including income criteria, margin money requirement of HFCs are comparatively flexible. Therefore, if you have a lower credit score, you should try applying for a home loan through an HFC.

  • Are you looking for banking services with your home loan?

Banks offer a wide range of banking services such as online banking, locker facilities, credit and debit cards, overdraft facilities, and more. If you require these facilities, then you can apply for a home loan from the bank itself. Otherwise, compare the other factors including, repayment tenure, fees associated with HFCs and then choose accordingly. Today, even HFCs like Tata Capital offer longer repayment tenure, up to 30 years.

In a nutshell

After reading this article, you should have a better understanding of what to consider when selecting a bank vs HFC for a home loan. Each has its pros and cons. Which one you pick ultimately depends on your preferences. You can also plan out the repayment structure using an online home loan EMI calculator. Thus, research carefully, and if in doubt, consult an expert.

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