If you have ever checked loan offers from different lenders, you may have noticed something. NBFC interest rates are usually higher than bank interest rates. Many people wonder why this happens. The answer is simple. NBFCs work in a different way, follow different rules, and serve a different type of customer.
This blog explains everything in easy words. By the end, you will understand exactly why NBFC interest rates can be higher and how they affect you as a borrower.
1. NBFCs Give Loans to High-Risk Borrowers
The service right away that comes with higher interest rates, one of which is NBFCs’ customer type, is a major reason for it. The lending arm of NBFCs is loose and thus gives loans to people who might not get a loan from a bank, such as those listed below.
These include,
- Low-credit-score individuals
- Fresh employees
- Freelancers
- Small business proprietors
- People with no credit history at all
Banks reject these customers more often because their loan risk assessment process is strict. NBFCs take this risk, so they charge a little higher. This helps them cover possible losses and keep their business stable.
2. Too Many Differences Amongst Regulations
The banking sector and NBFCs have different sets of rules that apply to them. A bank can borrow money on cheaper terms because it is tightly regulated and has access to public deposits as well.
On the contrary, NBFCs cannot accept savings deposits, and so they borrow funds from the capital market at higher rates, increasing the cost of borrowing for NBFCs even more.
Borrowing Cost Differences
| Lender Type | Access to Public Deposits | Borrowing Cost | Result |
| Banks | Yes | Low | Lower loan rates |
| NBFCs | No | High | Higher loan rates |
This is one of the biggest reasons why NBFC loans cost more than bank loans.
3. Faster Approvals and Flexible Rules
NBFCs are able to lend money more quickly than banks. In fact, there are some instances where a borrower can receive the amount needed in just a few minutes. On the other hand, banks go through a rigorous process, and that’s why they take longer.
People who need quick cash choose NBFCs because the process is simple. But this speed comes with a price. Faster processing increases the lender’s risk. This affects factors affecting loan pricing, leading to higher interest rates.
NBFCs have also
- Flexible income rules
- Easy documentation
- No strict credit scores
- Digital applications
- Instant disbursal
These benefits make loans accessible. But they also increase lender risk, which pushes NBFC interest rates upward.
4. Cost of Operations
Typically, NBFCs also spend more money on
- Digital systems
- Approval technology
- Customer verification
- Data analytics
- App-based services
All of these are good for the customer and the customer experience, but unfortunately, they come at a cost. Therefore, slightly higher interest rates can be set for that reason.
Operational Cost Factors
| Cost Type | Banks | NBFCs |
| Branch-based operations | High | Low |
| Digital technology investment | Medium | High |
| Customer verification tools | Basic | Advanced |
| Impact on Rates | Lower | Higher |
5. Higher Flexibility Means Higher Risk
Banks do not like taking risks. They follow strict loan rules. NBFCs are more friendly and flexible. They give loans to people who need support or have irregular income.
But higher flexibility increases the chance of late payments. This is why NBFCs use a different loan risk assessment process, which again affects interest rates.
Conclusion
NBFCs are helpful, fast, and flexible. But because of the customers they serve, the high cost of borrowing, and digital operations, NBFC interest rates are often higher than bank rates.
Understanding why NBFC loans cost more, the loan risk assessment process, and the factors affecting loan pricing helps you make a smart borrowing choice.
Choose NBFCs when you need quick approval or have low credit history. Choose banks when you want low-cost loans and meet strict eligibility rules.
