Bank Vs Housing Finance Company: Differences & Advantages

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22 JUNE, 2023

Deciding between Housing Finance Companies (HFCs) and traditional banks to obtain a home loan can confuse potential homebuyers. Contrary to popular belief, HFC finance is not an unregulated entity. They operate under a license granted by the National Housing Board (NHB) and provide home loans in line with NHB guidelines.

On the other hand, banks are subject to regulation by the Reserve Bank of India (RBI). We will explore and understand both options to help you make an informed choice while taking home loans.

Home Loan Finance Company (HFCs)

HFC full form in banking is Housing Finance Companies, they are corporate entities that operate under the Companies Act of 1956. Their primary focus is providing housing loans or finance through various direct or indirect means. While they were initially regulated by the National Housing Bank (NHB), the responsibility of handling HFCs was transferred to the Reserve Bank of India (RBI) in 2019. However, certain regulatory powers remain with the NHB.

The introduction of HFCs aimed to ease the growing demand for housing loans and give credit access to different income groups. Currently, HFCs disburse a more significant number of home loans compared to banks, primarily due to their greater flexibility. More than 25 HFCs are operating in India.

Difference Between HFC vs. Bank for Loans

So here you can see the basic difference between bank and a finance company:

Points of Distinction	Bank	HFC
Interest Rate	The interest rate is slightly lower, tied to the MCLR established by the RBI.	The home loan interest rate is comparatively higher when compared to banks.
Flexibility	Banks exhibit limited flexibility in loan approval, involving extensive paperwork and processes.	HFCs display high flexibility in loan approval, with a streamlined and uncomplicated process.
Credit Facility	Banks provide overdraft facilities based on regular EMI payments and a favorable CIBIL record.	HFCs do not offer overdraft or credit facilities for their sanctioned loans.
Documentation Process	The documentation process can be protracted and time-consuming.	The documentation process is expedited and efficient.
Duration	The loan disbursement process is often protracted, resulting in longer average processing times.	HFCs are known for their quick loan sanctioning, leading to reduced processing durations.
CIBIL Score	Banks maintain stringent standards for CIBIL scores and tend to reject applicants with lower scores.	HFCs demonstrate flexibility in considering CIBIL scores during the loan evaluation process.

Advantages and Disadvantages of HFCs and Banks

Advantages of HFCs:

Flexible loan approval: Housing Finance Companies (HFCs) generally offer more flexibility in loan approval than banks. They have streamlined processes and often require less extensive paperwork, making it easier and quicker for borrowers to obtain a loan.

Consideration of lower credit scores: HFCs are often more lenient in considering lower credit scores. They may be willing to provide home loans to individuals with less-than-ideal credit histories, offering opportunities for those who may face challenges securing a loan from banks.

Disadvantages of HFCs:

Higher interest rates: A Home loan finance company offers home loans with higher interest rates than banks. This can result in higher overall interest payments over the loan tenure, increasing borrowers' borrowing costs.

Advantages of Banks:

Lower interest rates: Banks often offer home loans at lower rates than HFCs. This can lead to significant savings in interest payments over the loan tenure.

Availability of banking facilities: Banks provide a comprehensive range of banking services, including overdraft facilities. This allows borrowers to leverage surplus funds to reduce their loan liability and make additional withdrawals as needed.

Disadvantages of banks:

Stringent loan approval process: Banks typically have more stringent loan approval processes involving extensive documentation and scrutiny. This can result in longer processing times and more rigorous eligibility criteria, making it challenging for some borrowers to qualify for a home loan.

What Should You Choose Between Banks And Hfcs?

In recent years, leading Housing Finance Companies in the country have made remarkable enhancements to their loan products and services. This makes them a compelling option for borrowers seeking lenders with more flexible eligibility requirements. On the other hand, if you have an established relationship with a bank and meet their rigorous eligibility criteria, it may be worth considering the same bank for your home loan.

Whether you choose a bank or an HFC, selecting a trusted lender with extensive industry experience is crucial. This will ensure that you can fulfill your dream of becoming a homeowner in the most convenient and hassle-free manner.

FAQs Bank vs. HFC

How is HFC different from other financial institutions?

HFCs can choose the discount based on customer requirements and prevailing market conditions. This allows them to offer customized mortgage interest rates to suit the needs of individual borrowers.

What role do HFCs play in the overall banking ecosystem?

Housing finance companies (HFCs) provide home loans and loans for housing-related needs to individuals and builders, filling gaps left unaddressed by traditional banks. They are crucial in propelling growth in India's housing sector by democratizing housing credit.

How can I apply for HFC finance, and what are the eligibility criteria?

Check your eligibility based on age, income proof, and work experience. Gather the required documents and apply online or at an HFC branch. The HFC will evaluate the property, decide the loan amount and disburse it after approval. You must make timely EMIs per the loan agreement to repay the housing loan.

Can I expect different interest rates or loan terms from banks compared to finance companies?

Banks and finance companies can offer different interest rates and loan terms. Banks may have stricter requirements and potentially lower rates, while finance companies may be more flexible but offer little higher rates.

Can I negotiate the interest rate for my home loan?

While banks and HFCs fix interest rates for home loans, there is room for negotiation based on your profile, loan amount, and repayment history. The larger the loan size and stronger your financials, the higher your chances of negotiating a better rate.

How long does it typically take for an HFC to process a home loan application?

Getting a home loan from HFCs is a streamlined process requiring simple formalities. Once completed, the bank can approve the loan within 3 to 5 days.

Can NRIs (Non-Resident Indians) avail of home loans from HFCs?

Given the borrower's non-resident status, a Power of Attorney (POA) becomes significant for Housing Finance Companies (HFCs) as it allows for a designated representative to handle any required dealings on behalf of the NRI.