Should One Take Loan from a Bank or a Housing Finance Company

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In case you are looking to apply for a home loan anytime soon, it will do you good if you consider Housing Finance Companies over traditional banks. Why? Housing Finance Companies are regulated by National Housing Bank while traditional banks are regulated by the Reserve Bank of India. This point of difference poses an obvious distinction between the natures of home loans provided by both.  The rate of interest on a home loan taken from an HFC is determined on the basis of an internal rate. This is popularly known as Primary Lending Rate. Through this the maximum rate of interest that the HFC can charge on a single loan is calculated. The actual rate of interest can be the PLR or even come with a discount on the PLR. In case of loans from HFC, borrowers with good credit score will be eligible for higher rates of discount.

Basic difference in interest rate calculation between banks and HFCs

In case of HFCs, customers cannot ascertain if he is getting the best deal as he is unaware of the lowest rate that is being charged by HFC to its customer with most impressive credit score. Previously, home loan from a bank also had their interest rate determined by means of the PLR. Such rules were altered by the RBI and instead a system of determining the base rate was put in place. This rate is the minimum below which a traditional bank will not be lending any loans except to its employees. The difference between the actual rate charged and the base rate is known as the spread of banking parlance.

System of prepayment of loan

In most cases, borrowers of home loans prefer prepaying the loan amount completely before the repayment tenure. They also sometimes arrange for the loan to be transferred to a different lender. In case of traditional banks penalty charges are incurred in both cases. Over years the prepayment rules have been altered from time to time and the HFC rules are different from that of a bank now. The prepayment scheme that you will be allotted is based on the nature of your loan. There are floating rate home loans which are approved at a fixed rate of interest but has been categorized under floating rate tenure. On such loans, the HFCs do not charge you any penalty for partial or full prepayment.  Similarly, in case of fixed rate home loans, HFCs do not charge penalty for prepayment. But this rule applies only when you pay for this loan using your own resources so as to not incur penalty charges. Own sources may include informal borrowing from people close to you.  Transferring the loan to another bank or HFC becomes a chargeable procedure. In case you wish to shift your fixed rate home loan to a separate HFC a two percent penalty will be applicable.

How banks operate

When it comes to prepayment penalties, banks function in a dubious manner. Traditional banks do not charge penalty on floating home loans. However, for fixed rate home loans it depends on the individual policy of each bank. Therefore, you will be required to carry out your own research about the banks that have suitable policies for your needs. It is always better to apply for home loans under fixed rate from HFCs if you wish to prepay loans at any time before the end of repayment tenure.

The miscellaneous aspects to be considered

The location of your property also has a role to play in your decision of whether to take loan from a bank or an HFC. In some cases borrowers are unable to take home loan from their bank because of the bank not operating within the area of their property. In such cases HFCs can come to your rescue because it does not have such rigid rules in place. HFCs are far more liberal in approving loans even if you are unable to produce some of your documents. Ease and the element of availability, thus, become crucial factors as to why taking home loans from HFCs is a better idea than going for a traditional bank.

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