Houses hold an aspirational value in Indian society, setting a benchmark for an individual’s success. As a result, this aspirational value often leads people to set out on the quest to finance their own home, the moment they have a steady income.
Home loans are typically the go-to option to finance this dream purchase. However, not everyone can meet the eligibility criteria set by traditional financial institutions. When met with multiple rejections, many form the misconception that owning a house is not meant for everybody.
This is where Housing Finance Companies emerge as a possible credit avenue. These home loan companies are known to have flexible eligibility criteria, helping you finance your property purchase without a hitch.
Interested to know more about HFCs? Read on as we discuss these entities in detail, comparing them with banks, and exploring their advantages and disadvantages.
What is a Housing Finance Company?
Housing Finance Companies, or HFCs, are entities that are governed by the Companies Act 1956. These entities were initially regulated by the National Housing Bank (NHB). However, the regulatory power was later shifted to the RBI in 2019.
Initially, they were introduced to address the increasing housing loan demands by extending credit facilities to a diverse range of income groups. However, today these corporates have become a significant source of home loans.
As of now, HFCs have managed to surpass banks in terms of loan disbursement volume. This is mostly due to their flexible lending practices. Today, increased popularity and growth in demand have led to the operation of more than 25 home loan companies in India.
Key Differences Between HFCs and Banks
There are numerous differences between the operations of a bank and a housing finance company. The following table offers a glimpse into these differences:
Criteria
Banks
Housing Finance Companies
Interest Rates
They offer home loans at comparatively lower rates
They have slightly higher interest rates for home loans
Flexibility
Banks display limited flexibility, involving more comprehensive and rigorous documentation and processes
HFCs facilitate greater flexibility, with streamlined procedures and less intensive paperwork requirements
Credit Facility
They provide overdraft facilities based on consistent EMI payments and good credit scores.
HFCs do not offer overdrafts or additional credit facilities on sanctioned loans
Documentation
Banks are known for lengthier and more complex documentation procedures
HFCs feature more efficient and faster documentation processes
Disbursement Time
Characterised by longer processing time for loan disbursement
Recognised for quicker loan sanctioning and reduced processing time
CIBIL Score Requirements
Banks adhere to strict CIBIL score criteria, often declining applicants with lower scores
HFCs are known to offer some flexibility for applicants with lower scores
Advantages of Housing Finance Companies
HFCs offer a few unique set of advantages to their customers, enabling them to become one of the most sought-after entities for housing loan solutions. These include:
1. Specialisation in Housing Finance
Housing Finance Companies have a focused expertise in housing finance. Since these companies are only limited to the housing segment, they possess in-depth knowledge and offer tailored solutions for housing-related financial needs.
This specialisation allows home buyers to experience informed and customised services.
2. Flexibility in Loan Approval
Housing Finance Companies are known for offering greater flexibility in the home loan approval process. This includes a more accommodating approach to credit score and income verification.
Where traditional financial institutions usually have stringent eligibility criteria, HFCs emerge as a better and more beneficial alternative for borrowers facing loan rejections.
3. Serving Lower Income Segments
Usually, commercial banks are more inclined towards providing property financing solutions to individuals with a high credit score. This is because banks prefer applicants who are reliable and are less likely to default on loan repayment. Such a tendency leaves out a majority of the low-income segment.
HFCs are known to reach out to this segment of the population by providing lenient home loan solutions. This accessibility helps promote house ownership among a broad spectrum of society.
Disadvantages of Housing Finance Companies
Similar to other entities, Housing Finance Companies also have some disadvantages that customers should be wary of. These include:
1. Higher Interest Rates
HFCs are focused only on the housing segment of the nation. Such a hyper-focused nature of services leads to them charging a higher interest rate as compared to the ones offered by standard commercial banks. A higher interest rate can be a significant disadvantage to borrowers as it increases the overall loan amount significantly.
2. Limited Financial Products
HFCs have an edge over banks as they reach out to the low-income segment of the population. However, unlike traditional banks, HFCs offer a limited number of financial products and services. This puts them at a disadvantage since customers usually look for a one-stop shop for all of their financial needs.
What Should You Opt For?
The final decision to opt for an entity between banks and HFCs depends on your individual needs and preferences. If you have an already established relationship with a bank and are meeting its eligibility requirements, opting for a bank will be more beneficial since these offer lower interest rates.
On the other hand, if you are seeking flexibility in loan eligibility criteria and are looking to secure a loan quickly and efficiently, HFCs are a good choice.
The Bottom Line
Housing Finance Companies play a pivotal role in the Indian housing sector by catering to the diverse needs of homebuyers. Owing to their flexible eligibility criteria, robust customer service, efficient documentation, and reduced processing time, HFCs have cemented their place as one of the best lending companies for home loans.
That said, HFCs are not the only entities offering affordable and flexible home financing solutions. Non-Banking Financial Companies (NBFCs) are also known to be a good alternative for securing home loans.
In the current housing segment, Tata Capital home loans emerge as the most attractive and affordable home financing solution. Known for its streamlined application process, swift approval, and instant loan disbursement, Tata Capital has cemented its name as one of the best home loan providers in India.
Further, Tata Capital’s home loan EMI calculator helps you plan your EMI and tenure with ease. Visit the Tata Capital website today!
16 February 2024
6 mins read
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