Choosing between a bank and a non-banking financial company (NBFC) involves more than comparing interest rates. Borrowers should assess the total cost of credit, eligibility criteria, repayment terms and the safeguards available if a dispute arises.
Banks and NBFCs offer several overlapping loan products, but their pricing, underwriting practices and product terms can differ.
Interest rates depend on the loan and borrower profile
The difference in pricing between banks and NBFCs can vary by loan category, particularly for unsecured credit. Borrowers with limited credit histories or irregular income may find NBFCs more accessible, but the interest rate could be higher.
Mukul Devpura, director and co-founder of WeCredit, said the rate gap is widest in unsecured credit.
Piyush Beli, director and co-founder of ZapCash, noted that home-loan pricing tends to have a narrower gap, while business-loan rates depend on factors such as cash flows, collateral and the borrower’s credit profile.
Borrowers should compare offers for the same loan amount, tenure and type rather than assume one category of lender will always be cheaper.
Compare the total cost, not just the EMI
A lower advertised interest rate does not necessarily translate into a cheaper loan. Processing fees, insurance premiums, late-payment charges and other applicable costs can increase the amount a borrower ultimately pays.
The Key Facts Statement (KFS) provided by the lender sets out key loan terms, including the annual percentage rate (APR), which reflects the annualised cost of credit. Borrowers should compare the APR, the total amount repayable and the net amount disbursed after upfront deductions.
Beli said borrowers should also check whether insurance or other products are bundled with the loan and understand which charges are mandatory.
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Check eligibility alongside the cost of borrowing
Eligibility requirements vary across lenders. Some NBFCs cater to self-employed borrowers, gig workers, small businesses and people with limited credit histories who may not meet a particular bank’s underwriting criteria.
However, easier eligibility does not automatically make a loan suitable. Borrowers should assess whether the EMI fits their income and existing obligations, particularly when the interest rate is high or income fluctuates.
Devpura and Beli emphasised the importance of responsible underwriting when lending to borrowers with limited formal income documentation or weaker credit profiles.
Understand what happens if the lender faces financial distress
Deposit insurance and loan repayment are separate matters. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures eligible deposits held with insured banks up to ₹5 lakh per depositor per bank, including principal and interest, subject to its rules. Deposits placed with NBFCs are not covered by DICGC insurance.
For borrowers, a lender’s financial difficulties do not automatically extinguish an outstanding loan. Repayment obligations generally continue unless the loan is settled, waived or otherwise modified under applicable legal or contractual arrangements.
Borrowers should retain loan agreements, repayment schedules, bank statements and payment receipts to help establish their outstanding balances and repayment history.
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Verify the lender and the digital lending app
Before applying, borrowers should verify the identity of the lender and confirm that the NBFC is registered with the Reserve Bank of India (RBI). Registration alone should not be treated as a guarantee of a lender’s financial health or the suitability of its products.
For app-based loans, borrowers should identify the regulated bank or NBFC actually providing the credit rather than rely only on the name of the app or its marketing claims.
Beli advised borrowers to check the relevant RBI resources for digital lending apps and avoid platforms that demand unexplained upfront payments or fail to disclose the lender and loan terms clearly.
Check prepayment charges and interest-rate resets
Prepayment terms can affect the cost of closing a loan early.
RBI rules effective January 1, 2026, prohibit prepayment charges on specified floating-rate loans, including qualifying loans to individuals for non-business purposes. The applicable rules depend on the loan, borrower category and sanction or renewal date. Borrowers should check whether their particular loan is covered rather than assume the exemption applies to every loan.
Fixed-rate loans and loans outside the scope of the exemption may have different terms, subject to applicable regulations and the loan agreement.
For floating-rate loans, borrowers should also understand how changes in the benchmark rate affect their EMI or tenure. Beli said borrowers should monitor changes to loan terms, including any applicable spread revisions, and seek clarification from the lender when repayment schedules change.
Know the recovery rules and grievance process
Banks and NBFCs must follow applicable RBI requirements on recovery practices. Borrowers should not face intimidation, harassment or other prohibited collection practices because they have missed a payment.
If a dispute arises, borrowers should first submit a written complaint to the lender and retain the complaint reference and supporting documents. If the lender does not respond within 30 days, or the response is unsatisfactory, borrowers may be able to approach the RBI under the Reserve Bank–Integrated Ombudsman Scheme, subject to its eligibility and procedural requirements.
Borrowers should also check the lender’s grievance-redressal policy and escalation contacts before taking a loan.