Personal loans are usually disbursed to individuals either by banks or by other financial institutions like Non-Banking Financial Companies (NBFCs), to help cover their personal expenses like marriage, home building, children’s education, purchasing cars, etc. They are generally availed when one is short on funds or is faced with a financial emergency. These loans are unsecured and do not require the borrower to pledge any collateral asset.
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What is the difference between banks and NBFCs?
The major difference between the two is that a bank is a licensed financial institution which is authorized by the government to provide banking and financial services. On the other hand, a private company which provides banking services but does not hold a banking license is termed as NBFC.
All banks functioning in India are also registered under the Banking Regulation Act of 1949, whereas an NBFC is a finance company which is incorporated under the Indian Companies Act of 1956.
However, both banks and NBFCs have certain eligibility criteria for personal loans based on factors like minimum income of borrowers, their credit history, and employment among other things.
Should you consider a bank or NBFC while taking a personal loan?
Prior to applying for personal loans, look at some of the differences between banks and NBFCs in terms of the services they offer.
Interest rates
Banks usually apply floating interest rates over personal loans which increase or decrease based on policy changes of the Reserve Bank of India. NBFCs fix interest rates on personal loans based on the prime lending rate that is not affected by the Reserve Bank’s policy changes. This, in turn, enables borrowers to have high amount of personal loans sanctioned at nominal interest rates.
Loan sanctioning process
Banks take a long time in processing personal loan applications; borrowers are required to visit branches in person with application forms to apply for loans. However, the personal loan sanctioning process of NBFCs is comparatively faster, which make them a better option for borrowers. Their online loan application facility is another added benefit that substantially reduces the loan processing time.
Loan terms
People prefer to avoid tedious paperwork wherever possible. Applying for personal loans from NBFCs is advantageous as compared to that from banks, as NBFCs offer flexible terms and conditions for personal loan applications. This spares the borrower a lot of paperwork and time.
Customer offerings and services
A business entity is defined by the quality of customer service it offers. Undoubtedly, NBFCs provide better financial offerings and services to their customers as compared to banks. They provide personal loans at lower interest rates and often have relaxed foreclosure terms.
Loan eligibility criteria
NBFCs keep their eligibility parameters for personal loans simpler as compared to banks, which in turn enable borrowers to apply for personal loans without any unnecessary hassles. For example, if you are a borrower and you have a credit score which is not very low, then you may be eligible to apply for a personal loan from an NBFC but not from a bank.
Based on the above differences, NBFCs seem to be a better choice. Before you avail a personal loan, it is best to do your own due diligence and choose the one that suits you. Tata Capital is one such example of an NBFC that disburses personal loans. You can always go through the websites of various organization and calculate your EMI and interest rate based on your repayment appetite. The same theory is applicable if you choose to avail a personal loan from a bank also. Always do a check on what works best for you and choose between the best option.