Bank loan vs private lender loan: which is better?
People generally have two options when they want to take out a loan. While most people believe that government approved banks are the primary lender for loans, various other lending institutions can provide loans as well.
Both banks and private lenders are allowed to sanction and grant loans to ordinary people. Their process and rules and regulations are almost similar, but there are some differences that set them apart.
Sometimes it becomes difficult to choose between these lending institutions because people may not know which one will be the most profitable. It depends on the loan you want, as well as a few other factors. Take a look at the comparisons below to see which one is right for you.
Bank vs private lender: loan amount and interest rate
If we compare banks and private lenders on their loan amounts, the banks are taking the lead here. Banks can grant a larger loan amount to individuals than private lenders. Banks can give a larger amount because they have access to more ready funds than private lenders.
Banks have a large customer base with several checking and savings accounts that provide banks with the capital they need to make loans. Banks also have access to federal funds, which further adds to their available capital.
Meanwhile, private lenders do not have these funds. Usually, the capital that private lenders need to make loans comes from third party investors who provide the capital for profit. They can also use other banks to guarantee the capital at a fixed interest payable to the bank that lends the money.
Since banks can secure capital more effectively than private lenders, they can distribute large sums to applicants.
Banks and private lenders also have to pay a certain amount of interest to the sources from which they obtain their capital. Banks secure their capital with their customers and financial institutions, so they don’t have to pay them a lot of money in interest. Private lenders, however, have to pay a lot of interest to their investors and banks to receive their capital.
These reasons also explain why banks may grant loans at a slightly lower interest rate than private lenders. Since private lenders have to pay their investors a lot of money, they cannot charge less amount of interest.
Bank vs private lender: documentation and eligibility
The documentation process for banks and private lenders follows general guidelines, but they are still quite different. Each bank and private lender have their own rules and regulations that applicants must follow.
Here is a list of standard documents that banks and private lenders would require applicants to submit: –
- Photographic identity
- Aadhar card / Pan card / Driver’s license
- Salary slip or bank statements
- Other KYC documents
Although these documents are mandatory in all credit institutions, additional documents may be required in public banks. Many private lenders require less paperwork and documents to sanction loans than public banks. Public banks are also a bit skeptical about providing loans to young people.
Documentation requirements and eligibility criteria make it difficult for the self-employed and new or small entrepreneurs to obtain a loan from public banks. Public banks also require higher credit scores than private lenders. Some private lenders like Money View offers personal loans to people even with a CIBIL score of 600, while public banks need a much higher score.
Another thing to note is that the bank application and verification process is quite tedious as most of the time you will have to go to the bank to deliver your documents physically. Meanwhile, private banks and lenders like Money View have a fully online documentation process, which means you can download electronic copies of your documents online from the comfort of your own home.
Bank vs private lender: processing time
When it comes to processing time, you should keep the documentation process of banks and private lenders in mind. As mentioned earlier, banks will require you to physically present the various documents, while private lenders for the most part have an online documentation process.
Now, banks can take a long time to process your documents and ensure that you are eligible for the applied loan. They need to protect their customers’ money, so they take the time to review your request.
In private banks, the online process makes it relatively easy to upload documents at any time. Their processing time is also significantly faster. For example, Money View guarantees that the loan amount will be credited to your account within 24 hours of approval.
However, the banks cannot make such a promise. Hence, it is better to go to a private lender when you are in urgent need of a loan.
Advantages and disadvantages of banks and private lenders
It is difficult to reach a concrete verdict on both options. However, you need to know the pros and cons of each to understand where they stand.
- Higher loan amount
- Slightly lower interest rates
- A reliable source of loan security
- Difficult to get loans for young people
- In some cases, interest rates may be higher than those of private lenders
- Not suitable for small and new businesses
- Processing time is long
- Requires a higher credit score
- Easy documentation process
- Fast processing and amount credit
- Provides loans against lower credit scores
- Young and new business owners will easily get loans
- Slightly higher interest rates
- Lower loan amount
Who are the private lenders?
Private lenders are NBFCs recognized by the government and other banking institutions that operate in the private sector. Private entities obtain their capital from private and government financial institutions.
Private lenders aim to provide loans to people who have difficulty taking loans from public banks. They are quite flexible in their policies and eligibility criteria, which makes it easier for people to get loans.
Some of the most reputable private lenders in India are: –
- HDFC Bank
- Bajaj Finserv
- Silver View
- Axis Bank
Loans are a sure-fire way to give yourself an edge in times of financial insecurity. However, in the recent past, loans have ceased to be viewed as the sole recuperators of financial gloom to investment options and a safe way to build assets.
The conclusion after comparing all aspects is what to take loans from private lenders is simpler and more cost effective in many cases.
If you need quick loans and are willing to pay slightly higher interest, go with a private lender. However, if you need a large loan amount, you can opt for public banks.