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Bank Loan vs. Private Lender Loan: Which is better?

Bank Loan vs. Private Lender Loan: Which is better?

People usually have two options when they want to take a loan. While most people think of government-certified banks as the primary lender for loans, various other lending institutions can also provide loans. 

Banks and private lenders are both allowed to sanction and provide loans to ordinary people. Their process and rules and regulations are almost similar, but some differences set them apart. 

Sometimes it becomes difficult to decide between these lending institutions because people may get confused about which one will be more profitable. It depends on the loan you want, along with a few other factors. Take a look at the comparisons below to see which one is more suitable for you.

 

Bank vs. Private Lender: Loan Amount And Interest Rates

If we compare banks and private lenders concerning their loan amounts, banks here take the lead. Banks can provide a more considerable loan amount to people than private lenders. Banks can give a larger amount because it has access to more ready funds than private lenders. 

Banks have a vast customer base with several checking and saving accounts which provide banks with the capital necessary to provide loans. Banks also have access to federal funds, which further adds to their ready capital. 

Meanwhile, private lenders do not have these funds at their disposal. Generally, the capital private lenders require to give out loans comes from third-party investors who supply the capital to profit from them. They can also take the help of other banks to secure the capital at a fixed interest that is payable to the bank that is lending the money.

Since banks can secure capital more efficiently than private lenders, they can give out large amounts to applicants. 

Banks and private lenders also have to pay a certain amount in interest to the sources from which they secure their capital. Banks secure their capital from their customers and financial institutions, so they don't have to pay a lot of money in interest to them. Private lenders, however, have to pay a lot of interest to their investors and banks to receive their capital.

These reasons are also why banks can provide loans with a slightly lesser interest rate than private lenders. Since private lenders have to pay a lot of money to their investors, they cannot charge a lesser amount in interest.

Bank vs. Private Lender: Documentation And Eligibility

The documentation process of banks and private lenders follow the general guidelines, but they are still quite different. Each bank and private lender have their own rules and regulations that applicants have to abide by.

Here's a list of standard documents that both banks and private lenders would require applicants to submit:-

  • Photo identity
  • Aadhar Card/Pan Card/Driver's License
  • Salary slip or bank statements
  • Other KYC documents

While these documents are compulsory in all lending institutions, additional documents may be required at public banks. Many private lenders require lesser paperwork and documents for sanctioning loans as compared to public banks. Public banks are also a little skeptical about providing loans to young people.

The documentation requirements and eligibility criteria make it difficult for non-salaried and new or small entrepreneurs to secure a loan from public banks. Public banks also require higher credit scores than private lenders. Some private lenders like Money View offer personal loans to people even with a CIBIL score of 600, whereas public banks need a much higher score.

Another thing to note is that banks' application and verification process is quite tedious as most of the time, you would be required to visit the bank to hand in your documents physically. Meanwhile, private banks and lenders like Money View have a completely online documentation process which means you can upload your documents' soft copies online from the comfort of your home.

Bank vs. Private Lender: Processing Time

When it comes to processing time, you must keep in mind the documentation process of banks and private lenders. As mentioned before, banks will require you to physically present the various documents, while private lenders mostly have an online documentation process.

Now, banks may take a long time to process your documents and ensure you are eligible for the applied loan. They have to protect their customers' money, so they take time to consider your request. 

In private banks, the online process makes it relatively easy to upload documents anytime you want. 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 after approval. 

However, banks can make no such promise. Hence, it is better to go to a private lender when you urgently need a loan.

Pros And Cons Of Banks And Private Lenders

Making a concrete verdict on the two options is difficult. However, you should know the pros and cons of each to understand where they stand.

Public Banks

PROS:-

  • Higher loan amount
  • Slightly lower interest rates
  • A trusted source of securing loans

CONS:-

  • Challenging to get loans for young people
  • In some cases, the interest rates may be higher than private lenders 
  • Not suitable for small and new businesses
  • Processing time is long 
  • Requires a higher credit score

Private Banks

PROS:-

  • Easy documentation process
  • Fast processing and amount credit
  • Provides loans against lower credit scores
  • Youngsters and new business owners will get loans easily

CONS:-

  • Slightly higher interest rates
  • Lower loan amount

Who Are Private Lenders?

Private lenders are government-recognized NBFCs and other banking institutions which operate in the private sector. Private entities secure their capital from both private and government financial institutions.

Private lenders aim to provide loans to people who find it difficult to take loans from public banks. They are quite flexible in their policies and eligibility criteria, making it easier for people to secure loans.

Some of the most reputed private lenders in India are:-

  • HDFC Bank
  • Bajaj Finserv
  • Money View
  • Axis Bank

Conclusion

Loans are a sure-fire way to give you an edge when there is financial insecurity. However, in the recent past, loans have ceased to be witnessed as the sole retrievers from financial gloom to investment options and a secure way to create assets.

The conclusion after comparing all aspects is that taking loans from private lenders is more straightforward and profitable in many cases.

If you require fast loans and are willing to pay slightly higher interest, go for a private lender. However, if you need a considerable loan amount, you can opt for public banks.

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