Difference between Banks and HFC- Which one should you prefer?

Finance plays the most important role in the life of a home buyer. Buying a home is not an easy task but an involved challenge in itself. Having said that, most of the buyers are financially bound as there are a lot of responsibilities on their shoulders. There are instances when the dream of living in a new house stays a dream due to financial shortcomings.

Let’s assume that everyone is financially strong enough to fulfill their dream of a house, then what would be the next step in allocating those funds channeling them to fulfill the home buying needs? If you guessed it right, the first step would be to opt for a home loan. No one would go ahead and buy a house with all the savings at once. This is where a home loan comes into place which helps the buyer complete the home buying process without taking a financial hit.

The next step is to choose a lender who will provide the loan. There are two options to choose from. One is that we all know - Banks and the other is HFC or Housing Finance Companies. HFCs are set up under the National Housing Board for providing loans. On the other side, Banks are regulated by the Reserve Bank of India (RBI). Many buyers are in a constant quandary of choosing between the two when it comes to buying a house.

So the question stands as to what is the difference between the Banks and HFCs? Well, the answer is simple. The primary difference between them is their way of calculating the rate of interest on the loan. Banks follow the strict guidelines as enacted by RBI where they are ordained to follow the LTV value after April 2016. For example, for a property worth Rs.30 lakh INR, the maximum loan amount provided by the banks would be up to 80% of the property price. The rest 20% should be paid by the buyer as a down payment. The rates are fixed and must be strictly followed until specified otherwise by RBI.

The HFC and NBFC (Non-Banking Finance Company) on the other hand has no such restrictions on them. They are free to increase or decrease their interest rates as per their requirements. This makes them a little fickle and the time is taken for the rate improvements reach to the customers is more.

Both HFCs and Banks have their own benefits and drawbacks. You can get the best interest rates when it comes to banks. But in case your credit score is not up to the mark then going for HFCs should be a better option. It also depends on the type of service you are opting for. For example, if you wish to take banking services along with the loan then go for the bank. But if your sole purpose is finance then HFC should be the one for you to choose. The trends of the market change very swiftly so whatever may be the reason, doing proper research is essential before making the final decision.