Banks vs NBFCs vs Fintechs – How to Choose your Personal Loan

If you are an urban, tech-savvy person, chances are good that you have come across many loan options – Banks, Non-Banking Finance Companies, NBFCs (e.g Bajaj Finance) or Fintech Startups (e.g. Credy). While each of them has a unique place in the financial ecosystem, it can be hard to determine which option to go for when you have a need for money. In this article, we will explain to you the main differences between these finance options and how to choose one that fits your requirements.

Let’s start with a brief overview of the options available:

  1. Loan via a Bank – Banks are the oldest and largest kind of formal lenders. Banks “raise” (i.e. get money from investors or depositors) money at a relatively low cost (remember your bank saving rate of 3.5%) and have the benefit of a large user base. However, they are grappled with internal bureaucracy, slow technology adoptions and rigid rules which do not adapt to changing times (e.g. many banks won’t give a loan to employees of startups, even though they earn well!)
  2. Loan via NBFCs (Non-Banking Finance Companies) – NBFCs are the next biggest class of formal lenders. NBFCs generally specialize in financing certain asset classes (e.g. Bajaj Finance has a strong hold on consumer durable financing). They are more flexible than banks but still have a lot of manual processing steps and slow adoption of technology.
  3. Fintech Startups – Fintech (Financial Technology) startups are tech-powered companies which aim to innovate in terms of product, technology and customer service methods. They usually have quick disbursal of loans and offer better user experience along with some promotional offers (e.g. Credy offers fast personal loans with instant loan approval and up to Rs 5000 for referring your friends!)

 

The Comparison

Now that you know what these companies essentially are, here is a comparison of their major features.

Feature Banks Large NBFCs Fintech Startups
Time to Get Money Typically 5-7 days Typically 4-6 days Typically 1-3 days
Convenience Low Medium High
Reliability of Customer Service Low Medium High
Interest Rates 10-15% 14-20% 20-27%
Flexibility in Rules Low Low Medium
Paperwork Involved High Medium Low
Specialized Products Rarely Frequently Frequently

Process Comparison

Process Step Banks NBFCs Fintech Startups
Document verification Generally manual Generally manual Generally automated
Agreement signing Generally manual Generally manual Generally automated
KYC Generally based on self attestation, signing of photo copies Generally based on self attestation, signing of photo copies or eKYC for digitally advanced NBFCs Typically eKYC or scan image upload based
Other paperwork (e.g. cheques) Generally high Generally high Generally low

So How Do I Choose?

As you can see, Banks are best in terms of interest rates that they offer, and Fintech Startups are best in terms of user convenience and speedy service and Large NBFCs in terms of specialized financial products.

If your requirement is of say Rs 30,000 for 3 months, the total interest cost would be as follows:

Loan Provider Total Interest (Rs)
Banks 627
Large NBFCs 854
Fintech Startups 1,132

The hyperlinks take you to details of the loan terms – EMI, interest, principal etc.

As you can see, the difference in total interest between Banks and Fintech Startups would come to around Rs 500. If your requirement is urgent, this difference is something you may be willing to pay for speedy service.

Recommendation: If you want a fast personal loan for less than Rs 2 Lakh, it is better to go for Fintech Startups than Banks or Large NBFCs.

Recommendation: If the amount you require is more than Rs 2 Lakh, you can consider Banks or Large NBFCs.

Another factor to consider is your profile.

Recommendation: If you have any delays in past loans or credit cards, it is better to go for Fintech Startups than Banks or Large NBFCs since Fintech Startups are willing to more comprehensively look at your profile than just your credit score. Other lenders may waste your time in reviewing your application and then tell you it is rejected because of previous delays which may be more than 5 years old. As a healthy financial practice, you can generate your free CIBIL report here and your free Experian report here.

Recommendation: If you work in a startup / small company or have changed jobs or moved cities recently, banks or Large NBFCs may decline your loan application. For such a profile it is better to apply to Fintech Startups.

Recommendation: If you want a fast personal loan, the obvious choice is Fintech Startups.

NBFCs specialize in specific products – like Bajaj Finance for consumer durables or Muthoot Finance for gold financing.

Recommendation: If your requirement is for a specialized asset, you can go for the relevant NBFC.

To summarize, consider the loan amount, your profile, urgency and usage of your loan to determine the right loan option for you.

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Credy is an online loan startup which provides fast loans that are customized to your needs.

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