Bank Loans vs Private Loans: What to choose? Check private lender loans types, interest rates and how to borrow

As a borrower, you have the option to secure a loan from both banks and private lenders. While banks offer lower interest rates, private lenders provide a quicker and more hassle-free process. So, where should you take your loan from? The right choice depends on understanding the key differences between bank loans and private lender loans, including factors like interest rates, approval time and flexibility.

How do bank loans work?

A bank loan is a financial product offered by banks, regulated by the Reserve Bank of India (RBI) under the Banking Regulation Act, 1949.

If you have a good credit score and have enough time to wait for the application process to be concluded, taking a bank loan can be a great option. Banks have strict criteria for deciding the eligibility for getting loans. You have to provide a lot of documents and information such as bank statements and employment history.

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How do private lender loans work?

Flexibility is one of the main advantages of private lenders. NBFCs, individual moneylenders, peer-to-peer lending platforms and private finance companies are some of the common types of private lenders in India.

Compared to bank loans, documentation is considerably  less when applying for private lender loans. The main concern of a private lender is to judge if a person can repay the loan based on their current financial status.

If a person wants a loan quickly and doesn’t want to go through the formalities of documentation, then they can opt for a private lender loan.

ALSO READ: Personal Loan Eligibility: Check documents needed and other important factors

Differences between private lender loans and bank loans

Here are some of the areas where private lenders and banks differ on loans:

• Risk evaluation and application approval
  Banks have stringent rules for evaluating loan applications. It includes checking a person’s credit score, financial history and checking the overall history of the applicant. This ensures only those who are highly capable of repaying the loan get it. This strictness also leads to a lot of time consumption.

Private lenders don’t follow such strict practices. Such an approach ensures a much faster loan approval.

• Interest rates and fees 
  The interest rates charged by banks are much lower than those of private lenders. Keep in mind, though, that banks may charge processing fees, service charges and prepayment penalties.

Since private lenders are willing to take a lot of risk in lending, they are also likely to charge a much higher interest rate. It is important to note that private lenders seldom impose any additional charges.

• Flexibility and customisation
  Banks offer a set of predefined loan options. You have to browse through the options to decide which suits you the best. There is no room for customising the loans to suit your unique requirements.

You can modify the terms and conditions to a much greater extent when you borrow from a private lender. This is one of the main advantages of getting loans from private lenders.

• Ease of usage
  Online lending platforms and quick loan apps have made it convenient to apply for personal loans from your smartphone in just a few taps. The seamless application process helps the borrowers to avail funds in an emergency. With online loan apps, you don’t need to physically submit documents physically. The quick approval process also leads to almost instant disbursement. You can receive the loan amount in your bank account within a few minutes to a few hours depending on the lender. Most lenders are also offering loan apps packed with innovative features to cater to the needs of customers from all categories. The user-friendly features of loan apps not only simplify borrowing but also help in the seamless management of your loans.

ALSO READ: Emergency loan apps: Check Pros and Cons before borrowing

Conclusion

To choose between a bank loan and a private lender loan, you need to choose your priorities. Start by comparing loan terms, borrowing costs and your financial situation to determine which option best suits your needs.

If you prioritise lower interest rates and transparency, a bank loan is your best option. If you need quick approval and more flexible terms, a private lender may be the better choice.

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