Private Lending Has Gained Momentum during the Pandemic

A birds eye view of Perth City high rises and swan river in the background.

The COVID-19 crisis hit the world, affecting individuals and businesses. As many people lose their jobs due to the pandemic, they have started seeking out loans. But as coronavirus continues to spread, several lenders and banks are making it tough to get loan approval.

Australia has an ongoing credit gap that appears to grow unceasingly, especially with this pandemic. But it seems that borrowers are seeing the benefits of a non-bank financial model.

Private lending has been around for decades. However, it is somehow getting even more popular since the beginning of the year. As more and more banks see the negative effect of the coronavirus to the economy, customers have begun to take out loans from private lenders instead.

Credit is tighter than ever, causing banks to hesitate in approving loan applications of property investors and businesses. Of course, they are also making it tougher for risky customers.

The Impact of the Coronavirus on Private Lending

Before the Australian government decided to implement specific guidelines in slowing the spread of the virus, there was enough supply of money. Unfortunately, eradicating the virus includes a series of steps that eventually required people to stay at home and practise social distancing. During these times, it meant that several businesses had to close temporarily to prevent people from gathering in large numbers.

Private lending was one of the sectors that had an ample supply of cash flowing in. Additionally, capital markets were ready and healthy. They were searching for places where they can put money and among them were in loans.

The share market was performing quite well but significantly dipped due to losses. Investors and bankers had no choice but to pull back their hunger for placing funds. Due to the concern and growing fear surrounding the coronavirus, the capital providers had to wait and sit on the sidelines for a long while. Investors clearly do not want to deal with turbulent markets.

The federal government has introduced a fair number of initiatives to help businesses, workers, and homeowners during these hard times. However, financial support was not always enough. Many large banks have already stopped accepting applications for loans from customers. While there are some that honour their commitment to providing funds to approved loans, most have closed their doors to risky borrowers.

For banking institutions, now is not the time to provide loans to people whose employment status is uncertain. They will, of course, accept applications soon. However, many will wait until things have settled down. Several banks are just not willing to take undue risk.

Without a doubt, many Australians are experiencing financial difficulty. It is why the demand for different types of loans has increased since the pandemic. People are looking for financial support during these hard times.

Consumers are much shrewder now than in the past. They have plans to help them continue with their lives even during a crisis. But many average people and even businesses were unprepared for an outbreak like COVID-19. Most were ready for power outages and natural disasters, but not everyone was quick enough to consider widespread and extended quarantines.

Private lending, just like banks, faced challenges because of the coronavirus. But the difference is that many lenders are willing to accept applications from borrowers.

Interest rates are low, which means that the non-bank finance industry is not earning as much as before. Nevertheless, there are fixed income opportunities that would allow investors to provide funds to the right borrowers.

Contract signing completed for private lending.

Private Lenders: The Ready Sources of Funds

As the crisis worsens across the globe, the initial reaction of many financial organisations was to pull back. It did not just affect businesses but also the citizens and the whole country. In such a time, some groups are willing to extend a hand, including private lenders.

These lenders act as a source of capital for small businesses and even individuals that require financing. People want to protect themselves financially. But with no job, there is no income. Investors that fund private lending are also searching for ways on how they can earn and make the most out of their money.

Low-interest rates benefit the borrowers, but not the lenders. When lenders have to face lower rates, it means they have lower potential earnings out of a deal. No one would want to earn less and finance risky borrowers. The key is to find a fixed income opportunity, which can be in the form of mortgage security over real estate.

Using property as collateral may be useful in helping out the economy, as well as investors. With banks avoiding applications, especially from new borrowers, investors are taking their places. But the key is to find a matching business and fund this company in exchange for first mortgage security against a property.

It may sound confusing, but the process has some simple explanations. A mortgage is used as a security measure to protect a private lender. This way, the lender will not have to worry about financial losses in relation to the borrowed funds. The lender also earns the right to take the property and become its legal owner should the borrower stop repaying the loan.

This property can be resold if the consumer fails to honour the loan agreement’s terms. To remove this right from the lender, the borrower should pay the loan in full, along with the outstanding interest, if any.

The mortgage is not limited to home loans since it can also be registered to secure a business loan. It may even be utilised as a guarantee if the borrower is not the homeowner.

In such an exchange, the lender is in a more secure position. Therefore, there is a minimal risk of losing money in case the borrower fails to repay the loan. In addition to the security, registering more than one mortgage is possible for the same property. However, the lender holding the loan secured by the second (or even third) mortgage will take on a higher level of risk.

 

A birds eye view of Perth City high rises and swan river in the background.

The New Normal

Before COVID-19 affected lenders and banks, there was already something brewing in the industry. Many lenders who had a lot of capital but did not have enough deals would lend to other lenders. There were other trends in the private lending space, but this tactic was one of the fastest-growing.

However, the pandemic changed a lot of things, including private lending. Suddenly, mortgage refinancing saw high numbers while personal lending continued to decrease in demand. Small business lending, however, soars. These changes may be implications of the new normal even when the current crisis is over.

COVID-19 did lead to massive unemployment. Small businesses had to close for the short-term while the others remained on standby even with restrictions easing all over the country. Nevertheless, private lenders note the surge in loan applications. What does it mean? Although unexpected events did cause certain disruptions, some sectors can benefit from the crisis as long as they keep their eyes open for opportunities.

What Investors Should Know

Many investors have made the mistake of selling by listening to their emotions. While we are in a time of uncertainty, emotional selling is not the answer. Still, it does not mean that the solution is to hold onto all positions until the crisis is over. If, as an investor, you already had an investment strategy before the pandemic hit, you will surely fare better.

What can you do now to protect your assets? One of the most important things that you should do right now is to stay calm. Never panic even when you are unsure about many things.

Then, follow these hints:

  • Find where the market is moving. Some areas have private lending picking up at a fast pace. Federal and state governments have issued stimulus packages intended for small businesses. These businesses, particularly those that survived the crisis, may be looking for a private loan.
  • Identify opportunities, even those that are available for the short-term. Waiting for investment markets to return to normal can take a lot of time. Volatility, for now, remains the new normal. Sitting things out may not be the best strategy.
  • Find out what happened during the previous crises. You could find similar patterns. For instance, you may see that commercial real estate performed quite well despite those disasters. On the other hand, the residential sector may have struggled.
  • It is a great time to diversify your portfolio. Before COVID-19, you probably got stuck with a specific asset class. But that particular class may be under pressure right now. For instance, if your speciality was in high-risk investments, perhaps you may want to shift some assets to a different class. This way, you can protect your financials while also use it to hedge against losses.

Many private lending practices will likely change by the end of the year, including underwriting. No one can tell how significant COviD-19 will impact private lending over time. But by looking at the possible opportunities, there will always be good deals waiting, especially with more borrowers turning to private lending.

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