Public and private banks both are regulated through RBI guidelines. But there are many differences between the terms on which they offer loan and the rate of interest offered. The popularity of private banks in recent times have increased as it has been able to acquire young customers and business class.
Home loan is one of those loans whose application process is among the lengthiest and its conditions being strict as compared to other loan types. Thus, here we will discuss in detail about the differences one can find in the process of a public bank home loan at low interest rates and a private bank home loan process.
- Interest Rate Update: Home loan interest rate are changed by bank often as and when RBI declares it’s repo rate. It is often seen that whenever repo rate is increased by RBI private banks have immediately increased their interest rates as well including the current customers. However, when the repo rate is decreased by RBI the interest rate of private banks do not usually go down as much. Besides, the interest rate of existing customers is also not reduced much.
In the case of public banks the interest rate policy is much more transparent than private banks. They usually change their rates even of existing customers as per the change in repo rate by RBI.
- Prepayment Charges: Even now, most private banks DO NOT allow prepayment of the loan without any additional charges. As in the case of the loan prepayment banks are loosing on their interest income thus, they put additional prepayment charges as a certain percentage of the outstanding amount or the amount being paid in lump sum. For example, if the outstanding amount is Rs. 6 lakh and prepayment are done of Rs. 2 lakhs then additional prepayment charges of 2% is levied on the outstanding balance of Rs. 4 lakh, which comes out as Rs. 8,000 extra for prepayment.
In another case if the whole of Rs. 6 lakh is paid the 2% is levied on Rs. 6 lakh, so charges come out as Rs. 12,000.
In the case of public banks there are no prepayment charges, though you must read their terms and conditions carefully before taking the loan.
- Prepayment Limit: Some of the private banks also have a specified limit up to which you can prepay your loan in a single time. For example, if the limit is 25%, then at a single time you can not repay more than 25% of your outstanding loan amount.
In the case of public banks no such conditions are set thus, you can reduce your debt whenever you have extra money to repay your loan.
- Prepayment Period: Normally, private banks have a lock-in period of 6 months or 1 year before which you cannot repay your loan. This is because EMIs are designed to have the highest interest amount at the start and then reduce with time.
Public banks usually do not put such restrictions, however even if they do then the lock-in period is often around 6 months.
- Processing Fee: Private banks have higher processing fee as they have to pay commission to Direct Selling Agents as well. Such a case is not there with public banks, thus their processing fee is low.
The above discussion proves that public banks have better conditions and are usually cheaper than private banks.