Bank Loans vs. Private Lenders: Choosing the Best Home Financing Option

Read on to learn the crucial differences between a bank loan and a private lender

When it comes to getting a home loan online or offline, there are numerous avenues that you can explore. Among the most popular options are a bank loan or a private lender, such as a home financing company. Although both banks and private lenders offer financing, the two have major differences.

It is essential to understand how these options vary from each other. This will help you make an informed borrowing decision and choose an option that best suits your personal preferences and financial needs.

Read on to learn the crucial differences between a bank loan and a private lender.

What is the Meaning of a Bank Loan and a Loan from a Private Lender?

A bank loan is financing that you can get from banks for a specific timeframe. After approval, once your loan is sanctioned, you can utilise these funds to cover your planned or unplanned financial needs.

A bank offers various forms of credit, including personal loans, home loans, vehicle loans, education loans, gold loans, and much more. While a few types of loans may be secured, bank loans also include unsecured forms of credit.

Secured loans simply mean you must pledge an asset as collateral, whereas an unsecured form of credit does not require you to pledge collateral or security. A home loan is a secured form of credit, while a personal loan is unsecured.

Banks are traditionally considered a safer borrowing option since they are regulated by the Reserve Bank of India. Typically, banks offer a home loan with comparatively lower interest rates.

Private lenders are entities that provide finances to a wide range of investors. Like banks, they offer personal loans, vehicle loans, home loans, and more. These institutions are privately owned, and most of them allow you to apply for home loans online from the convenience of your home.

Private lenders are known to have relaxed eligibility terms and are known for better customer service.

What is the Difference Between a Bank Loan and a Private Lender for Home Financing?

Check out some crucial pointers that differentiate a bank loan from a private lender offering a loan to purchase a home.

1. Loan Processing and Approval

Technological advancements in the financial sector have made loan approvals and sanctions faster than ever. Private lenders are adopting the latest technologies, offering considerably faster loan approval, and sanctioning processes.

You can easily apply for a home loan online and get approval within 4 to 5 working days. However, getting a home loan is time-consuming as it is a secured form of credit. The approval time can vary from one lender to another. These loans are sanctioned after the lender assesses your collateral.

On the other hand, banks require significant time to conduct a comprehensive background check. They have a comparatively rigid process, rigorous verification, and requirements that make the process longer.

However, many banks are also adopting the latest technology and sanctioning loans faster.

2. Eligibility and Document Requirements

Compared to private lenders, banks have more stringent eligibility and paperwork requirements for getting a home loan. They check your credit score, credit history, income and employment, age, and other factors while approving your home loan.

If you have a lower credit score, you may find it difficult to get your home loan approved by a bank. This is because lenders check your creditworthiness and ability to repay the loan using the score.

That said, even private lenders do review these parameters before loan approval, but they have comparatively flexible eligibility and documentation requirements. You can apply for a home loan online with a private lender, even with a lower credit score. These lenders may use alternative credit scoring models and other factors to evaluate your creditworthiness.

3. Interest Rates

You can see major variations in the home loan interest rates offered by banks and private lenders. This is because the Reserve Bank of India regulates the interest rates of banks. Banks cannot independently set interest rates for their home loans.

They need to benchmark their interest rates as per RBI’s repo rate and other rates like the marginal cost of lending rate. Though, this may change in response to the changing economic climate. So, interest rates for home loans that banks offer are more transparent.

In contrast, private lenders decide their home loan rates based on the Prime Lending Rate. This is not directly linked to the Reserve Bank of India. The institution establishes these rates as per their internal policies.

You can use a home loan EMI calculator to assess your monthly instalments by inputting the rates of banks and private lenders. This will help you plan your finances better. You can compare various loan options before zeroing in on a lending institution using the calculator.

4. Stamp Duty and Registration Costs

When banks calculate your home loan amount, they typically do not incorporate expenses such as registration fees and stamp duty charges. These charges are an essential component of the total valuation of the property.

These charges are quite substantial, and paying them upfront needs proper financial planning. Hence, if you do not know the exact amount of these charges, it can cause issues.

On the other hand, many private lenders consider these charges when calculating the loan amount. This helps you include such charges in your home loan amount, and you do not need to cover these expenses later from your own pocket. However, this varies from lender to lender.

5. Safety and Security

Banks offer a higher degree of safety as compared to private lenders. This is because banks operate under the strict vigilance of the Reserve Bank of India. They make their decisions, like setting the interest rates, prepayment fees, document requirements, etc., in accordance with the RBI regulations.

On the other hand, most private lenders are not regulated by the RBI. Without prior intimation, they can change their lending terms and modify their home loan interest rates. So, borrowing from a private lender comes with a higher risk as compared to getting a home loan from a bank.

6. Loan Tenure

Private lenders typically offer home loans with longer tenures as compared to banks. Choosing a higher home loan repayment tenure allows you to extend your loan for a longer period. This results in paying lower monthly instalments.

Banks typically offer a lower home loan tenure than private lenders because of regulatory and risk constraints. Shorter tenures mitigate the risk of default and, therefore, safeguard banks from defaults.

However, if you plan to get a home loan, know that a loan with a longer tenure will be expensive in the long run. This is because a loan with a longer tenure can result in higher interest payments.

Which Option to Choose for Home Financing: A Bank Loan or a Private Lender?

There is no one-size-fits-all option when getting financing for a home. Choosing between a bank or a private lender depends on your financial standing, credit history, and personal preferences.

If you have a strong credit profile and a good credit score, you can choose to get a home loan from a bank. It may be a safer option since it is regulated by the RBI. Also, a bank offers lower interest rates than private lenders.

On the other hand, private lenders have less stringent eligibility criteria and document requirements. They also offer longer home loan tenures when compared to banks.

You can also apply for a home loan from a private lender if you have a low credit score. This is because they have alternate credit-checking mechanisms.

Obtaining a home loan online from a bank or a private lender offers distinct advantages. While choosing a lender, ensure that they offer loan terms that meet your budget.

Using a home loan EMI calculator can help you understand which tenure and repayment plan suits you best. This will help you choose the most suitable financing option.

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