Well, if you are reading this blog it might be a 60% chance that you are not aware about Housing Finance Company (HFC). Well, let’s introduce what HFC means. HFCs are a legally recognized corporate organization that operates under Companies Act 1956 and regulated by both RBI (Reserve Bank of India) from 2019 and National Housing Bank (NHB) before 2019. Still a majority of things are under NHB. The primary objective of both a bank and a Housing Finance Company is to lend money for home loans. But what is the difference and what to choose? Let’s understand in detail.
As you know, Banks are financial institutions that offer a wide range of financial services, including home loans. They are regulated by the Reserve Bank of India (RBI) and must adhere to its strict guidelines. Housing Finance Companies (HFCs) are specialized financial institutions that provide home loans. primarily focus on housing finance and often cater to customers who may not meet the strict criteria set by banks.
Did you know? MCLR stands for Marginal Cost of Funds-based Lending Rate. It is the minimum interest rate that banks in India can charge on loans. The MCLR is based on the bank’s cost of funds, which includes interest rates paid on deposits and other factors.
1.Broadening Access:HFCs were set up to make housing finance easier for more people, including self-employed individuals, those with irregular income, and people with lower credit scores who may not qualify for loans from regular banks.
2.Flexibility in Loan Terms: HFCs provide more flexible loan terms than banks. They often offer personalized solutions, like customized repayment plans and easier eligibility requirements, to better meet borrowers' needs.
3.Promoting Home Ownership: HFCs help support government efforts to increase home ownership and improve housing conditions, especially in cities and smaller towns, by offering financing options.
Banks calculate the interest rate linked to the RBI’s repo rate or the bank’s MCLR. When the RBI adjusts the repo rate, banks adjust their lending rates accordingly. This means that your home loan interest rate can fluctuate over time. If a bank adds a spread of around 0.9% then your home loan interest if you avail at 8% then it can go up to 8.9%.
But in case of Housing Finance Company (HFC) they follow the Prime Lending Rate (PLR) and this is not regulated by RBI, it’s regulated by National Housing Bank (NHB). Suppose a PLR is 15% then HFC decides to add a 5% then the home loan will be cheaper.
Banks have strict rules for approving loans. They check your credit score, income stability, job history, and current debts before giving you a loan. Banks typically require a CIBIL score of 750 or above for loan approval.
HFCs have easier loan eligibility rules than banks. They serve a wider range of people, including self-employed individuals, those with irregular income, and those with lower credit scores.
Lower credit score does not mean below 650 HFC. Also consider some strict policies but lower than banks.
Banks usually take longer to process loans because of their strict verification and paperwork. It can take several weeks for a loan to be approved and given out. Banks conduct thorough checks, which can delay the approval process.
HFCs process loans faster because their procedures are simpler. They can approve and disburse loans within a few days to a week.
Banks have strict rules to check everything related to your age, income, LTV ratio, repayment capacity and many other things but in case of HFC they are flexible enough with accessing the marker value of the property, income and other things. Hence, it will be easier to get a high loan amount.
You all are aware about how important a CIBIL Score is, banks usually don’t give home loans to those who have below 750 CIBIL Score. Hence, here HFC is flexible enough to give you a home loan even with a low CIBIL Score.
| Description | Banks | Housing Finance Company |
|---|---|---|
| Interest Rate | High | Low |
| Eligibility Criteria | Strict | Strict but less from Bank |
| Loan Processing Time | High | Low |
| Relaxation in CIBIL Score | Strict | Strict but less from Bank |
| Description | Banks | Housing Finance Company |
|---|---|---|
| Interest Rates are flexible in HFC | ||
| Easy eligibility criteria than banks | ||
| Short loan processing time in case of HFC | ||
| Higher loan amount for home loan than bank | ||
| Relaxation CIBIL Score |
Choosing between a bank and a housing finance company (HFC) for a home loan depends on factors like interest rates, loan duration, eligibility, processing time, customer service, and fees. Banks usually have lower interest rates but stricter criteria, while HFCs offer more flexibility and personalized service. Evaluate your financial situation, compare lenders, and choose the one that best fits your needs.
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It depends on your specific needs. Banks offer lower interest rates but have stringent criteria. HFCs are more flexible and provide personalized service.
Yes, you can transfer your home loan from an HFC to a bank if the bank offers better terms.
Banks usually offer floating interest rate home loans, but some banks may also offer fixed rate options.
Compare interest rates, loan tenure, eligibility criteria, processing time, customer service, and charges of both options before making a decision.
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