Homeloan sanction is of utmost importance in the home buying process and thus prospects search for a financial lender begins. The interest rate and tenure to repay the loan are two main concerns of every homebuyer. Thus we let you know the difference between the banks and the housing finance companies [HFCs].
1. Understanding Banks and HFCs
HFC i.e. Housing Finance Company is a registered firm under the Companies Act, 1956 (1 of 1956) and deals in monetary transactions of objects like property and thus offer financial assistance to buy immoveable asset like home. However, HFCs are also formulated only after receiving license from the Reserve Bank of India.
The bank is a regularized financial institution in the country deals with the monetary transactions as it is necessary for the working of an economy. All countries across the globe have fractional reserve banking and all banks work under this umbrella. Similarly, in India, we have RBI [Reserve Bank of India] that regulated banks and frame guidelines for the banking sector at regular intervals.
2. Factors to Consider Lender
Every loan borrower must compare the rate of interest, processing fees, tenure for the repayment of loan offered by the banks and the housing finance company before applying.
3. Difference between Benefits offered
Firstly, according to the directive laid by RBI, the banks have to pass the MCLR i.e Marginal Cost of Funding Rate to the loan borrowers. These financial lenders transfer the benefit of changing interest rate and policies to the loan borrowers at the earliest.
Whereas the Housing finance company to do not follow such guidelines as they offer loan based on prime lending rate.
Secondly, the banks offer Overdraft facility that allows the loan borrower to repay the loan amount at the earliest in case he/she has surplus funds. This is important as the interest payable is a bigger burden on the borrower in comparison to the principal amount. The overdraft facility is pivotal in curbing interest rate on the loan availed as the submission of additional amount in the loan account act as a prepayment of loan and thus reduces the interest rate.
However, the housing finance company does not have any such provision.
Thirdly, the banks have strict rules to adhere and thus require all the necessary documents along with a good credit score. But, those with low credit score can opt for the housing finance company to avail home loan. The unavailability of prepayment charges for floating rate loans, a cap on LTV [Loan to Value] and provision for bad loans are the factors that let the loan borrowers consider HFCs as a perfect lender.
Every loan borrower has different requirement and repayment condition. Thus, you have to take a final call on which one to opt for.