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NBFC vs Bank – Which is Better for Personal Loan?

Submitted by admin on November 5th, 2024

Comparing a personal loan from a NBFC with that of traditional banks may be quite difficult when you are making your decision. Nevertheless, both institutions issue personal loans, although the terms of issuance of the loan, its amount, interest rates and the time taken to process a loan differs with the institutions, the criteria of eligibility also vary. In this article, let us compare and contrast NBFCs to banks so you can identify which may suit you as a borrower for your personal loan.

1. Interest Rates

Banks: While availing personal loan from banks may attract slightly lower interest rates compared to NBFCs, if the candidate has a good credit history to propose. Banks follow RBI interest rate policies and remain affordable which is due to the following reasons. Currently, most of the banking institutions set interest rates for personal loans ranging from 10% and 16% based on the credit score of the client.

NBFCs: It is also important to note that NBFCs tend to quote slightly higher levels of interest than that offered by banks. Yet unfortunately for those with a poor credit score or no credit history at all, NBFCs may consider approving a loan where a bank may not. NBFCs are relatively capable of providing Small and Medium Enterprise loan programs that are capable of ideal interest rate models that will accommodate the different customer types thus NMFCs are easily available with applicants.

2. Eligibility and Documentation

Banks: Generally, the established banking institutions operate with a higher level of risk aversion and usually set higher credit score of over 750 and much documented paper work. Examples of the documents often asked for include, income statements; identity proofs, address proofs; credit reports. Banks also conduct some sort of credit checking normally at a more critical level to determine the repayment capability of the applicant.

NBFCs: NBFCs are known for their relaxed eligibility criteria, making them more accessible to individuals who may not qualify for loans from banks. NBFCs often provide loans to individuals with lower credit scores or those with inconsistent income streams, like freelancers or gig workers. They may also have more lenient documentation requirements, often requiring fewer financial statements, which can make the application process quicker and simpler.

3. Loan Processing Time

Banks: These financial institutions take longer time compared to online banks since they involve much extensive verification. This process can take from several days up to several weeks if the borrower has complicated financial situation. Banks ensure that each of the credits they offer is paid with the right amount of detail, and this can take longer to disburse the loan.

NBFCs: This takes us to another staggering feature of NBFCs which is swiftness in processing loans and advances. A large number of NBFCs have automated their loan origination channels to fund and sanction loans in less than a day, ideally within 24-48 hours, for small ticket size. Due to this insight on NBFCs, it enlists borrowers who require funding urgently for instance in some emergency.

4. Loan Amount and Tenure

Banks: Holding all factors constant, the levels of credit exposure in banks are higher in terms of the loan amount and the repayment period compared to NBFCs. A bank personal loan can be availed up to ₹50,00,000/- or more having the repayment tenure up to 7 years. This makes banks even more attractive to borrowers that require a larger amount and those who wish to pay in instalments over a longer period.

NBFCs: NBFCs also provide loan amounts, unlike banks, but in many cases, the loan amounts they give are likely to be lower. The term which is provided by NBFC’s is comparatively small and varies between one and five years. However, NBFCs might not offer much flexibility in terms of EMIs but they are comparatively much more flexible in terms of restructuring of the loans.

5. Credit Score Requirements

Banks: Banks are conservative on credit scores and one is likely to be approved if they have a score of 750 and above. Credit score sums up the level of creditworthiness of an individual and a high credit score increases likelihood of getting a low interest rate by banks for loans.

NBFCs: NBFCs are little more lenient while it comes to credit scores and are willing to offer loans to those with credit scores less than 750. General lenders take into account many parameters beyond credit score, including employment and steady monthly income, which makes it possible for the persons with lower scores to get a loan.

6. Additional Charges and Fees

Banks: Banks usually give personal loans at an origination fee which ranges between 1% and 3% of the loan amount. These are discussed and fixed, with much lesser chances of concealed charges.

NBFCs: NBFCs may have a nominal processing fee, extra charges such as prepayment charges or they can be different from the lender to lender. Borrowers should make sure they look at those since they affect the cost of loan.

Who is More Suitable for Personal Loans?

Both banks and NBFCs have unique advantages, and the choice largely depends on the borrower’s priorities and financial situation:

Select a Bank if you have a good credit rating, if you are looking for a big amount to be borrowed, and if you want an interest rate as low as possible. Banks are able to offer a better rate for those of them who have fixed income and relevant credit score. Thus, even if the application may take quite some time, banks are the best suited for those who are willing to pay a low price for their funding.

Go for an NBFC if you have poor credit history, require instant loan approval, or you are not patience-rich to run around for documents. The NBFCs are comparatively more lenient in the case of eligibility and they too take less time in disbursing the loans. This explains why NBFCs are favorable to people who require money urgently or are ineligible for a bank loan.

All in all, they are at different levels and possess their respective merits. This is important to do because then a person can assess their wants or needs, look at what offers they have the most appealing rates and terms, and make a decision based on budget and how soon they need to the money.