Bank Lending Vs. Private Lender: Which Is Better?
People usually have two options when looking to take out a loan. While most people think of federally certified banks as the prime lender for credit, various other credit institutions can provide credit as well.
Banks and private lenders are allowed to sanction ordinary people and grant loans. Their procedure and rules and regulations are almost similar, but some differences set them apart.
Sometimes it becomes difficult to choose between these credit institutions as people may be confused as to which institution is more profitable. It depends on the loan you want and a few other factors. Check out the comparisons below to see which one is best for you.
Bank vs. Private Lender: Loan Amount and Interest Rates
If we compare banks and private lenders in terms of their loan amounts, banks come out on top here. Banks can lend people a larger amount of credit than private lenders. Banks can give a larger amount because they have access to more funds than private lenders.
Banks have a large customer base with several current and savings accounts that provide the banks with the capital they need to lend. Banks also have access to federal funding, which further increases their available capital.
However, these funds are not available to private lenders. In general, the capital that private lenders need to lend comes from third party investors who provide the capital to benefit from them. You can also enlist the help of other banks to secure the capital at a fixed rate of interest payable to the lending bank.
Because banks can raise capital more efficiently than private lenders, they can spend large amounts on applicants.
Banks and private lenders also have to pay a certain amount of interest to the sources from which they secure their capital. Banks secure their capital with their customers and financial institutions so that they do not have to pay them a lot of money in interest. However, private lenders have to pay their investors and banks high interest rates in order to preserve their capital.
For these reasons, banks can also lend at a slightly lower interest rate than private lenders. Since private lenders have to pay a lot of money to their investors, they cannot charge lower interest rates.
Bank vs. Private Lender: Documentation and Eligibility
The documentation process of banks and private lenders follows the general guidelines, but is still very different. Every bank and private lender have their own set of rules and regulations that applicants must adhere to.
Here is a list of standard documents that both banks and private lenders would require from applicants:
- Photo identity
- Aadhar Card / Pan Card / Driver’s License
- Payroll or bank statements
- Other KYC documents
While 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 compared to public banks. The public banks are also somewhat skeptical of lending to young people.
The documentation requirements and approval criteria make it difficult for freelancers and new or small business owners to secure a loan from public banks. Public banks also require higher credit scores than private lenders. Some private lenders like this Money View also offers personal loans with a CIBIL score of 600. atwhile public banks require a much higher score.
It should also be noted that the banks’ application and verification process is quite tedious as in most cases you will have to visit the bank to physically hand in your documents. Private banks and lenders like Money View now have a fully online documentation process, which means that you can upload the soft copies of your documents online from the comfort of your own home.
Bank vs. Private Lender: Processing Time
In terms of processing time, you need to take into account the documentation process used by banks and private lenders. As mentioned earlier, banks require you to physically present the various documents, while private lenders usually have an online documentation process.
Now it can take a long time for the banks to process your documents and ensure that you are eligible for the loan you applied for. They need to protect their customers’ money so take the time to review your request.
At 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 deposited into your account within 24 hours of approval.
However, banks cannot make such commitments. Hence, when you are in dire need of a loan, it is better to go to a private lender.
Advantages and disadvantages of banks and private lenders
A concrete assessment of the two options is difficult. However, you should know the pros and cons of each one to understand where they stand.
- Higher loan amount
- Slightly lower interest rates
- A trusted source for securing credit
- Difficult to get loans for young people
- In some cases, the interest rates can be higher than those of private lenders
- Not suitable for small and new businesses
- Processing time is long
- Requires a higher credit rating
- Simple documentation process
- Fast processing and credit
- Offers loans against lower credit ratings
- Loans are easy for young people and new entrepreneurs
- Slightly higher interest rates
- Lower loan amount
Who are private lenders?
Private lenders are government-approved NBFCs and other banking institutions that operate in the private sector. Private companies secure their capital with both private and state financial institutions.
Private lenders aim to provide loans to people who have difficulty getting loans from public banks. They are quite flexible in their guidelines and eligibility criteria, which makes it easier for people to obtain credit.
Some of the most reputable private lenders in India are:
- HDFC bank
- Bajaj Finserv
- Money view
- Axis bench
Loans are a surefire way to give you an edge in times of financial uncertainty. In the recent past, however, credit has no longer been seen as the only trailblazer from financial gloom to investment options and a safe path to wealth creation.
The conclusion after comparing all aspects is that the ingestion of Loans from private lenders is easier and more profitable in many cases.
If you need quick loans and are willing to pay slightly higher interest rates, contact a private lender. However, if you need a substantial amount of credit, you can go for public banks.