Is an NBFC personal loan better than a bank loan? Pros and cons explained

Borrowers typically have to make a choice between traditional banks and NBFCs when considering a personal loan. Each is different in the advantages and disadvantages, and this article discusses the pros and cons of availing a personal loan from NBFCs compared to banks.

Understanding banks and NBFCs

Banks are regulated financial institutions which are allowed to take deposits, give personal loans, and provide an extensive variety of other financial services and products. They are under the tightest of regulations governed by the RBI, which ensures a high degree of dependability and stability.

NBFCs, render financial services such as loans and credit facilities that are similar to those rendered by banks. Despite all these prohibitions, NBFCs are necessary for extending credit to a range of industries, which supports financial inclusion.

Pros of taking a personal loan from bank

• Lower interest rates: Banks also provide personal loans with low interest rates, especially to customers with a good credit score. These can amount to significant savings over the duration of the loan.
• Financial services diversification: In addition to personal loans, banks also provide a variety of financial services so that the customer can club multiple financial requirements into one single package.

Cons of taking a personal loan from bank

• Strict eligibility conditions: Banks impose relatively higher eligibility conditions, as they require improved credit score and income verification that might eliminate some candidates.
• Higher processing times: Due to the nature of manual verifications involved, banks take a longer time in disbursing and sanctioning personal loans.

Pros of taking a personal loan from NBFCs

• Flexible eligibility criteria: NBFCs have more relaxed eligibility criteria, in which they provide accommodation to people with non-traditional income sources.
• Faster processing: NBFCs are even likely to disburse and grant loans faster than provisional banks because of faster processes and less paperwork.

Cons of taking a personal loan from NBFCs

• Higher interest rates: NBFCs are able to charge higher interest rates than banks in order to compensate for increased risk due to more relaxed qualification standards.
• Restricted financial services: In contrast with banks, NBFCs only deal in targeted financial products and do not deliver many services.

Making the right choice

It is important to check various NBFCs and banks before choosing either one for a personal loan. You should understand:

1. Your creditworthiness: To discover lender approval potential for your loan application along with favourable terms you need to determine your financial position regarding creditworthiness.
2. Compare terms: Obtain the most economical option by comparing the entire spectrum of bank and NBFC fees along with interest rates.

In conclusion, in the case of personal loans, both banks and NBFCs have unique pros and cons. You can make the most of your loan option by thoughtfully considering these factors based on your specific financial circumstances and requirements.

Disclaimer: Mint has a tie-up with fin-techs for providing credit, you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.