Owning a home can be a significant milestone for several individuals and financing the purchase may require borrowing funds. In India, individuals can borrow these funds from both public and private sector banks. However, understanding that there are differences in how public and private banks manage these loans is essential. This article explains why one should avoid taking a home loan from private banks.
High Interest Rates
One of the important features of any loan is the interest rate applied to the principal amount. The rates applied for home loans in India by private banks may be higher than those applied by public sector banks or Non-Banking Financial Companies (NBFC). This small difference may seem insignificant in the beginning. However, the range of housing loan tenures can range between 15-20 years, during which the small difference may result in an increased repayment amount. This can, in turn, significantly increase the total cost of the loan.
Strict Eligibility and Documentation
Another feature of private bank loans is their strict screening process. The eligibity conditions for income, employment history and credit score may be inflexible. Due to this:
- Salaried individuals who are employed at reputed organisations may receive approval swiftly.
- Self-employed borrowers or individuals who own small businesses may undergo severe scrutiny that requires the submission of multiple financial documents.
These inflexible processes may lead to delays in loan disbursements and create challenges for those individuals whose property purchase is time-bound.
Prepayment and Foreclosure Charges
Private banks may include conditions that limit the flexibility of repaying the loan before the end of the tenure. Due to this, borrowers who want to prepay or foreclose the loan may have to pay penalties. While these charges may vary among lenders, they significantly increase the cost of the loan. Additionally, even if the interest rate is floating, banks may apply repayment fees under specific conditions. Borrowers may therefore refrain from closing their loans early.
Opportunity to Negotiate Terms
While other lenders may provide an opportunity to negotiate home loan interest rate or repayment terms for their customers, private banks may include restrictions based on fixed policies. This rigid approach may reduce the options for borrowers based on their customised needs. Furthermore, this can also make loan management difficult during changing financial conditions.
Tenure and Monthly Repayment Amount
The repayment tenure is another important feature of a home loan. A longer tenure can result in reduced monthly instalments and make repayment manageable. Private banks, however, may offer shorter repayment periods that may increase the EMI amount. This limits the flexibility of repayment, forcing borrowers to adjust budgets in unfavourable ways.
Processing and Hidden Charges
Private banks may levy higher processing and other fees compared to other lenders. Some of these fees are as follows:
- Application fees
- Technical evaluation fees
- Legal verification fees.
Some banks may not highlight these charges at the initial stage. This may reduce transparency. Additionally, while these fees may seem insignificant when compared to long-term loans, they can increase the cost of borrowing.
Shorter Processing Time
While the shorter time taken by private banks to process loan applications may be preferable in urgent cases, they may not be preferred by every borrower. Individuals may agree to the terms without understanding due to the swift disbursal feature. Furthermore, the speed may prevent borrowers from comparing offers from different lenders. This can result in borrowers discovering favourable terms after signing the loan agreement.
Customer Service Concerns
The digital platforms and apps provided by private banks may have issues. Borrowers may find it challenging to resolve queries once the loan has been disbursed. Furthermore, resolving queries may involve multiple layers of communication, which may delay solutions. This lack of consistency may decrease borrower satisfaction over time.
Higher Cost of Borrowing
After combining various factors like interest rates, fees, shorter tenure and prepayment charges, the total cost of borrowing from private banks may be higher compared to other lenders. While the initial speed and customer interaction may be convenient, the long-term impact must not be ignored.
Conclusion
Choosing the right lender is as important as selecting the right property. The high interest rates, strict conditions, and additional charges that may be charged by private banks often make private bank loans a less convenient option for borrowing funds. Borrowers must also understand that a small difference in terms can significantly increase the total cost of the loan. Therefore, features of various lenders, including public banks or NBFCs, such as repayment tenure, ability to negotiate terms, customer service, and eligibility, should be taken into consideration to make informed borrowing decisions.
