Should you apply for a loan from an HFC or a bank? – Explained.

By Abhay Harish Shah, Realty Quarter

Housing Finance companies (HFCs) are companies which are licensed to provide house loans under the NHB’s rules by the National Housing Board (NHB). On the other side, The Reserve Bank of India (RBI) regulates banks. New house buyers are often in a difficult situation to decide whether to apply for an HFC or a bank loan. In addition to this, the latest liquidity crisis encountered by NBFCs has raised grave questions about their operating styles and worries about the effect of the liquidity crisis on their home loans.

Let’s see how NBFCs are different from a Bank loan:

Navin Chandani (Chief Business Development Officer of BankBazzar.com) describes, “The key difference between a bank and NBFC/HFC is how the interest rate is calculated. The RBI mandates banks to comply with the marginal cost of funds-based lending rate (MCLR) after April 2016. For instance, a major bank could have 35-40 basis points higher than its MCLR of 8.35% over the year on a home loan of up to Rs.30 lakhs. At set intervals which are obviously noted, the interest rate on an MCLR linked loan automatically changes. The prime lending rate (PLR) is connected to loans by HFCs and the NBFC.

Although banks can not lend at lower MCLR prices, PLR-linked loans are not restricted by that. HFCs and NBFCs can set their PLRs freely. This provides NBFCs more liberty to raise or lower their credit prices as required. However, this also means that it would take more time for the impact of rate cuts to reach customers.