In today’s dynamic financial landscape, borrowing money has become easier and more accessible than ever. With a few clicks, you can apply for a personal loan, a business loan, or even a home loan from the comfort of your home. But one common question borrowers face is:
Should I take a loan from a bank or a Non-Banking Financial Company (NBFC)?
Both banks and NBFCs offer a wide range of loan products, but they differ in their approach, eligibility criteria, processing speed, interest rates, and customer experience. In this detailed guide, we’ll break down the pros and cons of both lenders, and help you decide which is the better choice for your specific needs in 2025.
Key Takeaways
- ✅ Banks offer lower interest rates and higher loan amounts but have stricter requirements.
- ✅ NBFCs are faster, more flexible, and digital-first, ideal for quick needs or lower credit profiles.
- ✅ Compare offers from both using platforms like BankBazaar or Paisabazaar.
- ✅ You can always switch loans from NBFC to bank later using a balance transfer.
- ✅ Always calculate total cost of loan, not just interest—include processing fees, prepayment penalties, etc.
- ✅ Read the fine print, and don’t be lured only by instant disbursal—choose what truly benefits you long term.
1. Understanding Banks and NBFCs
🏦 What is a Bank?
A bank is a government-regulated financial institution licensed by the Reserve Bank of India (RBI) to accept deposits, offer loans, and provide financial services. Banks follow strict regulatory guidelines, have more stability, and offer lower interest rates due to their low cost of capital.
Examples: State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank
💼 What is an NBFC?
An NBFC (Non-Banking Financial Company) is a financial institution that provides various financial services like loans, investments, leasing, and insurance, but cannot accept demand deposits (like savings accounts). NBFCs are regulated by RBI under different norms and are known for their flexibility, faster processing, and customer-centric approach.
Examples: Bajaj Finserv, Tata Capital, Muthoot Finance, Indiabulls, Navi
2. Key Differences Between Banks and NBFCs
| Feature | Banks | NBFCs |
|---|---|---|
| Regulation | Regulated tightly by RBI | Regulated by RBI (lighter rules) |
| Loan Approval Time | 2–7 days | 24 hours to 3 days |
| Interest Rates | Lower (8%–14% approx.) | Slightly higher (10%–24%) |
| Credit Score Requirement | Strict (700+ usually) | Flexible (600+ accepted by some) |
| Processing Fee | 0.5%–2% | 1%–3.5% |
| Prepayment Charges | Often applicable | Sometimes waived or lower |
| Documentation | Extensive (ITR, Salary slips, etc.) | Minimal and digital in many cases |
| Loan Approval for Low Credit | Rare | More likely |
3. When to Choose a Bank for a Loan
Banks are typically a better choice for those who:
✅ Have a Good Credit Score
Banks usually require a score of 700+ for most unsecured loans. If you have excellent credit, you can enjoy lower interest rates and better terms.
✅ Need Lower Interest Rates
Banks have access to cheaper funds (through customer deposits), so they often offer lower rates on personal, home, and car loans.
✅ Require Higher Loan Amounts
For larger loans—such as home loans or education loans—banks are often the preferred choice due to better infrastructure and long-term servicing capacity.
✅ Prefer Traditional Processes
If you are comfortable with paperwork, physical verification, and branch visits, banks offer a structured and established lending process.
✅ Want Better Loan Tenure Options
Banks offer longer repayment periods (especially for home loans) with lower EMIs.
4. When to Choose an NBFC for a Loan
NBFCs can be a smarter option if you:
⚡ Need a Loan Quickly
NBFCs are known for faster processing—often within 24–48 hours. Some digital NBFCs offer instant loans with minimal documentation.
⚙️ Have Low or Moderate Credit Score
Many NBFCs offer loans to individuals with scores below 700, provided there’s proof of steady income or collateral.
📱 Prefer Digital Experience
Most NBFCs operate online-first and offer end-to-end digital processes, including eKYC, digital signatures, and real-time disbursals.
💼 Are Self-Employed
NBFCs are more lenient toward self-employed individuals or those with irregular income, as they use alternative credit models.
💸 Want Flexible Repayment Terms
NBFCs sometimes offer custom EMI structures, interest-only periods, or top-up loans more flexibly than banks.
5. Loan Products Offered by Banks vs. NBFCs
| Loan Type | Banks | NBFCs |
|---|---|---|
| Personal Loan | Low rates, strict checks | Faster, lenient on credit scores |
| Home Loan | Long tenure, low interest | Fast processing, flexible eligibility |
| Car Loan | Competitive interest, longer tenure | Faster approval, digital application |
| Education Loan | Lower interest, need collateral sometimes | Fewer NBFCs offer, higher rates |
| Business Loan | Collateral required, long process | Unsecured business loans with digital proof |
| Gold Loan | Less common, slower | Very common (Muthoot, Manappuram, etc.) |
| Two-Wheeler Loan | Available with low rates | Instant approval with e-documents |
| Consumer Durable | Not usually offered | Popular segment for NBFCs (EMI cards, etc.) |
6. Pros and Cons of Taking a Loan from Banks
✅ Pros
- Lower interest rates
- High trust factor
- Better for long-term loans
- More branch network
❌ Cons
- Lengthy approval process
- More documentation
- Less flexible eligibility criteria
- Not ideal for urgent needs
7. Pros and Cons of Taking a Loan from NBFCs
✅ Pros
- Quick disbursal
- Minimal paperwork
- Flexible eligibility norms
- Easy online application
❌ Cons
- Higher interest rates
- Shorter repayment tenure
- Higher processing fees
- May not offer large loan amounts
8. Interest Rates Comparison (2025)
| Lender Type | Loan Product | Interest Rate Range (Approx.) |
|---|---|---|
| Banks | Personal Loan | 9% – 14% |
| NBFCs | Personal Loan | 11% – 24% |
| Banks | Home Loan | 8% – 10.5% |
| NBFCs | Home Loan | 9% – 13.5% |
| Banks | Car Loan | 7.5% – 9.5% |
| NBFCs | Car Loan | 8% – 12.5% |
9. What Lenders Look For Before Approval
🏦 Banks will evaluate:
- Credit score (750+)
- Fixed employment
- Stable income history (3–5 years)
- Strong banking history
- Low credit utilization ratio
💼 NBFCs may consider:
- Alternative credit scores
- Digital behavior (e.g., UPI usage, transaction frequency)
- Income from freelance/side gigs
- Loan repayment trends from past NBFC data
10. Can You Switch Between NBFC and Bank Later?
Yes! This process is known as loan balance transfer.
If you:
- Took a loan from an NBFC at higher interest
- And your credit score has now improved
You can refinance your loan through a bank for a lower rate and better EMI terms. Many banks even offer processing fee waivers during such transfers.
7 Most Frequently Asked Questions (FAQs)
Q1. Are NBFCs safe for loans?
Yes, NBFCs registered with RBI are legal and safe. However, always check for the RBI registration number and read online reviews before applying.
Q2. Why are NBFC interest rates higher than banks?
NBFCs don’t accept savings deposits, so they borrow funds at higher rates. This increases their lending cost, which reflects in your EMI.
Q3. Can I get a loan from an NBFC with a CIBIL score below 650?
Some NBFCs approve loans for low scores but may charge higher interest or ask for a guarantor/co-applicant.
Q4. Do banks provide loans faster than NBFCs?
Typically no. NBFCs are faster due to digital-first systems. Banks may take 2–7 days, while NBFCs disburse within 24–48 hours.
Q5. Can I negotiate loan terms with NBFCs or banks?
Yes. If you have strong credit or existing relationships, you can negotiate interest rates, processing fees, or tenure.
Q6. Which is better for a gold loan: bank or NBFC?
NBFCs (like Muthoot or Manappuram) specialize in gold loans and offer faster approvals with higher LTV ratios.
Q7. Can I have loans from both NBFC and bank at the same time?
Absolutely. Just ensure your total EMI obligations don’t exceed 40–50% of your net income to avoid rejection or credit score drops.
Conclusion
There’s no one-size-fits-all answer to the question: Bank or NBFC—which is better for loans? It depends on your unique financial profile, urgency, credit score, and preferences.
If you value low interest and long tenure—and have a strong credit profile—banks are the ideal choice. But if you’re short on time, have a lower score, or need flexibility, NBFCs can be a real game-changer.
In 2025, the best way forward is to compare both options online using loan aggregator platforms and choose based on your convenience, eligibility, and cost.