NBFC vs Bank: Which is the Best Option for Personal Loans?

This blog discusses the nuances of applying for a Personal loan from lending bodies like banks and NBFCs and analyses which is the best option for a borrower

Updated On: November 19, 2024
8 min, Read

Whenever there is a requirement for a Personal Loan, there are a host of options available in the market. At first, one turns towards banks for any kind of loan which seems the most logical option. Then there are private lenders which are often called NBFCs or Non-Banking Financial Companies which also offer these loans. The difference between these two lending bodies is often confusing to an ordinary person who doesn’t understand financial business. In this write-up, let us try to understand the nuances of applying for a Personal loan from different types of financial lenders so that you can make the right decision for yourself.

Understanding NBFCs and Banks

What is an NBFC?

Non-Banking Financial Companies (NBFCs) are private lending bodies which offer you financial services like loans, investments, insurance or credit but don’t have a banking license to carry out essential banking services. They are formed under the Companies Act 1956. NBFCs are regulated by the Reserve Bank of India (RBI), however, they have a different set of regulations than the regular banks.

What is a Bank?

Bank too is an organised financial institution with a full banking license which offers almost all kinds of financial services like savings accounts, current accounts, fixed deposits, loans, overdrafts, credit cards and so on. It comes under the direct control of the Reserve Bank of India with stringent guidelines for them to follow. Banks must adhere to all the regulations of the apex banking body (RBI) with respect to capital requirements, lending and other services.

Key Differences Between NBFCs and Banks for Personal Loans

Criteria	NBFCs	Banks
Rate of interest	Higher than banks because they don’t have banking license but fall under RBI	Lower rates due to stricter laws and regulations laid out by the governing body (RBI)
Processing time	Quick approval and disbursal of Loan amount	Take time to approve due to lengthy verification and screening process
Eligibility Criteria	Relaxed, and applicants with low credit score can also apply	Very strict, loan is approved based on the credit score
Documentation	Works with fewer documents	Exhaustive list of official documents for the purpose of verification.
Customer Service	More digitised and supportive of digital option	A mix of traditional and digital support. Varies from bank to bank
Regulatory Compliance	More flexible as compared to the banks	Comprehensive set of rules which makes them less flexible

Pros and Cons of Choosing NBFCs for Personal Loans

Pros:

1. Quick Processing: The loan offered by NBFCs is approved and disbursed quickly as compared to the banks. This is quite helpful in case of any urgency.

Lenient Eligibility: These lending bodies are often more relaxed as compared to the banks so you have more chances of your loan getting approved, especially if you don’t have a regular job.
Flexible Loan Products: Your Personal loan can also be tailored according to your requirements, which makes the product more handy and special
Minimal Documentation: Unlike banks, you are not required to submit endless documents which are scrutinized without any guarantee of a loan, NBFCs work with minimal paperwork and take less time to sanction your loan application.

Cons:

1. Higher Interest Rates: Since there is a greater risk of defaults in loan repayment, NBFCs typically charge a much higher rate than banks.

Less Regulation: NBFCs are regulated by the RBI, however, they don’t fall under their direct purview like Banks, so they take time to win the confidence of the borrower.
Limited Range of Services: Remember NBFCs are not banks, so their range of services is quite limited.

Pros and Cons of Choosing Banks for Personal Loans

Pros:

1. Lower Interest Rates: Banks offer Personal loans with lower interest rates as compared to NBFC as they are stringent in their approval process.

Greater Security: Due to the strict adherence to RBI guidelines, Banks are often considered more trustworthy than other private lending bodies.
Wide Range of Services: Apart from loans, banks offer a range of financial services and you can avail of these services.
4. Better Customer Protection: The stringent regulations allow banks to be more transparent with their services, thereby winning the confidence of the customers.

Cons:

1. Stringent Eligibility Criteria: The process of getting your loan approved can be quite cumbersome and therefore it can be tough for people with a low credit score or without a regular job.

Longer Processing Time: The endless documentation, screenings and verification processes can be quite rigid and may take more time to approve your application.
Less Flexibility: There are no bespoke financial products like loans, you need to choose from the available options, which might not work for many borrowers.

Which One Should You Choose?

Your decision to choose between NBFCs and Banks depends on several factors which are as follows-
- Credit Score: If your credit score is more than 750, you might want to go with a bank loan and enjoy lower interest rates. Otherwise, NBFCs can be worth considering for their relaxed documentation.

- Urgency of Funds: The NBFCs are quite handy when the requirement of funds is urgent, as your application is approved quickly and the amount is disbursed in no time
- Loan Amount and Tenure: It is recommended you apply for smaller loans from NBFCs for their flexibility, however, long-term loans should be taken from banks as you get a better deal.
- Income Type: Self-employed Individuals or people with irregular income would find NBFCs more accommodating as compared to Banks.

How to Make the Right Choice

1. Assess Your Financial Needs: You should do a proper analysis of your loan requirement, the tenure you seek and the urgency of funds before choosing your financial lending body.

2. Check Your Credit Score: The credit score of an applicant gives you an idea of which lending body should be considered for your loan.

3. Compare Interest Rates and Terms: There are ample websites on the internet which can help you do a tentative comparison of your loans. Make use of these calculations to assess the best loan provider for your Personal Loan.

4. Consider Customer Service and Flexibility: Choose a lender with robust customer service which gives you flexibility with loan repayment.

By understanding the differences and carefully considering your options, you can make an informed decision that benefits your financial health in the long term.