Bank vs HFC: Which Is a Better Option for a Home Loan?
Of the many milestones Indians look at achieving in their lives, buying a home is definitely one of them. A great amount of research goes into deciding whether or not to buy a home or construct one according to your specifications. If you decide to go with the former, there is more research involved. Like which property developer to consider, the carpet area, and the amenities to name a few.
Once you zero in on a home, the next bit (and the most important) is how you plan to finance this purchase. Now, you are going to probably read this statement and think that you plan to take a home loan, of course. And that’s the course that almost everyone takes.
But the question to ask here is do you plan to take a home loan from a bank or a housing finance company (HFC)?
There are advantages and disadvantages to both, of course. So, here’s all you need to know to help you make the right decision.
What is a housing finance company?
Let’s start by understanding what an HFC is. An HFC is a non-banking finance company which, like traditional banks, offers home loans. Unlike a bank, though, HFCs only provide home loans.
Now, that you know what an HFC is, here are a few differences between banks and HFCs:
As you can see, both banks and HFCs have their advantages and disadvantages. So, which is a better option? Well, it all depends on what your needs are.
If you are looking for quick disbursal of funds
Sometimes there may be a situation wherein you find the perfect home but the only thing stopping you is getting the funds. So, you apply to a bank and an HFC for a home loan. You will realise, that since HFCs deal only with home loans and loans related to property, they will process your application faster than banks. You can opt for a bank home loan if you have enough and more time to gather funds. If not, opt for an HFC.
Verdict: HFC
If you are looking for leniency in documentation and assessment of credit score
As mentioned earlier, HFCs tend to have a more lenient documentation process when compared to banks. And while banks take your credit score very seriously, for HFCs, your credit score is important but is not a deciding factor.
So, if you have a credit score that may be low or don’t want to spend time doing paperwork, consider an HFC for your home loan.
Verdict: HFC
If you are looking for long-term savings
In general, repayment terms for a home loan taken from a bank is more favourable than those of a home loan taken from an HFC. The interest rate is relatively lower. While at face value the difference in interest rate may be 0.5% or lower which you may not think is much, the actual amount you end up saving is quite a bit.
For instance, if a bank offers you a loan of Rs.20 lakh for a 10-year home loan at 9% p.a., the EMI you will be paying is Rs.25,335. If you take a loan from an HFC for the same amount and tenure at an interest rate of 9.3% p.a., the EMI you end up paying is Rs.25,661.
This difference of Rs.326 doesn’t seem to be too much. However, over the course of 10 years, this amount adds up to Rs.39,120. Which is quite a bit.
So, if long-term savings is something you are looking for, taking a home loan from a bank is your best bet.
Verdict: Bank
If you have sufficient funds already in place
When it comes to buying a home, you probably already know that there are expenses that will not be covered by your home loan. This includes the down payment you make on your property. In fact, banks and HFCs, both, require you to make a down payment to be eligible for a home loan.
This being said, banks only provide you with a loan which is up to 90% of the value of the property in most cases. So, other costs involved such as stamp duty and registration are not covered by a home loan taken from a bank. This isn’t a problem if you have enough and more funds in place for these expenses. Which you ideally would especially if you are considering buying a home.
In case you don’t, though, you could always consider taking a home loan from an HFC. This is because HFCs tend to not only provide you with a loan that includes a percentage of the property value, but it also includes registration and stamp duty.
Verdict: If you have sufficient funds go with a bank, if not go with an HFC.
Documents required to apply for a home loan with banks and HFCs
While HFCs require you to submit fewer documents, there are a few documents that both banks and HFCs will require you to submit. These are:
Identity proof documents: Aadhar card, PAN card, and passport
Address proof documents: Telephone bill or electricity bill
Income proof documents: Latest Form 16 and income tax returns, last 3 months’ salary slips, and bank account statements for the last 6 months.
Property-related documents: These documents are for new homes and include the buyer agreement, allotment letter, and receipts of payments made to the builder or developer.
So, which do you choose?
To be honest, there is no one definitive answer to this question. Which one you decide on is based on your individual needs when it comes to buying a home. However, knowing the pros and cons of both these home loan options will help you make the right decision.
Remember, whether you decide to take a home loan from a bank or whether you decide to take one from an HFC, the most important thing you need to do is research. Once you zero in on one of the options, shop around and look for the bank or HFC (as the case may be) which offers you the best interest rates, tenure, and whose terms and conditions are favourable to you. It may take a little time, but this is research you definitely will not regret.
Once you zero in on a home, the next bit (and the most important) is how you plan to finance this purchase. Now, you are going to probably read this statement and think that you plan to take a home loan, of course. And that’s the course that almost everyone takes.
But the question to ask here is do you plan to take a home loan from a bank or a housing finance company (HFC)?
There are advantages and disadvantages to both, of course. So, here’s all you need to know to help you make the right decision.
What is a housing finance company?
Let’s start by understanding what an HFC is. An HFC is a non-banking finance company which, like traditional banks, offers home loans. Unlike a bank, though, HFCs only provide home loans.
Now, that you know what an HFC is, here are a few differences between banks and HFCs:
As you can see, both banks and HFCs have their advantages and disadvantages. So, which is a better option? Well, it all depends on what your needs are.
If you are looking for quick disbursal of funds
Sometimes there may be a situation wherein you find the perfect home but the only thing stopping you is getting the funds. So, you apply to a bank and an HFC for a home loan. You will realise, that since HFCs deal only with home loans and loans related to property, they will process your application faster than banks. You can opt for a bank home loan if you have enough and more time to gather funds. If not, opt for an HFC.
Verdict: HFC
If you are looking for leniency in documentation and assessment of credit score
As mentioned earlier, HFCs tend to have a more lenient documentation process when compared to banks. And while banks take your credit score very seriously, for HFCs, your credit score is important but is not a deciding factor.
So, if you have a credit score that may be low or don’t want to spend time doing paperwork, consider an HFC for your home loan.
Verdict: HFC
If you are looking for long-term savings
In general, repayment terms for a home loan taken from a bank is more favourable than those of a home loan taken from an HFC. The interest rate is relatively lower. While at face value the difference in interest rate may be 0.5% or lower which you may not think is much, the actual amount you end up saving is quite a bit.
For instance, if a bank offers you a loan of Rs.20 lakh for a 10-year home loan at 9% p.a., the EMI you will be paying is Rs.25,335. If you take a loan from an HFC for the same amount and tenure at an interest rate of 9.3% p.a., the EMI you end up paying is Rs.25,661.
This difference of Rs.326 doesn’t seem to be too much. However, over the course of 10 years, this amount adds up to Rs.39,120. Which is quite a bit.
So, if long-term savings is something you are looking for, taking a home loan from a bank is your best bet.
Verdict: Bank
If you have sufficient funds already in place
When it comes to buying a home, you probably already know that there are expenses that will not be covered by your home loan. This includes the down payment you make on your property. In fact, banks and HFCs, both, require you to make a down payment to be eligible for a home loan.
This being said, banks only provide you with a loan which is up to 90% of the value of the property in most cases. So, other costs involved such as stamp duty and registration are not covered by a home loan taken from a bank. This isn’t a problem if you have enough and more funds in place for these expenses. Which you ideally would especially if you are considering buying a home.
In case you don’t, though, you could always consider taking a home loan from an HFC. This is because HFCs tend to not only provide you with a loan that includes a percentage of the property value, but it also includes registration and stamp duty.
Verdict: If you have sufficient funds go with a bank, if not go with an HFC.
Documents required to apply for a home loan with banks and HFCs
While HFCs require you to submit fewer documents, there are a few documents that both banks and HFCs will require you to submit. These are:
Identity proof documents: Aadhar card, PAN card, and passport
Address proof documents: Telephone bill or electricity bill
Income proof documents: Latest Form 16 and income tax returns, last 3 months’ salary slips, and bank account statements for the last 6 months.
Property-related documents: These documents are for new homes and include the buyer agreement, allotment letter, and receipts of payments made to the builder or developer.
So, which do you choose?
To be honest, there is no one definitive answer to this question. Which one you decide on is based on your individual needs when it comes to buying a home. However, knowing the pros and cons of both these home loan options will help you make the right decision.
Remember, whether you decide to take a home loan from a bank or whether you decide to take one from an HFC, the most important thing you need to do is research. Once you zero in on one of the options, shop around and look for the bank or HFC (as the case may be) which offers you the best interest rates, tenure, and whose terms and conditions are favourable to you. It may take a little time, but this is research you definitely will not regret.
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