Private Lending vs. Bank Lending: Understanding the Differences
If you are looking for a loan, it is likely that your thoughts automatically turn to a traditional bank. You may already have a relationship with a bank that holds car loans, mortgages and the like. However, you are doing yourself a disservice if you maintain the status quo and do not explore the other options available in loan lending.
When looking beyond the bank, another excellent option is getting a loan through a private lender. While you may be familiar with the term, there is a chance that you have no experience with securing loans through non-bank lending.
You may have heard a few common misconceptions about private lenders. These ideas stemmed from decades-old accounts of unregulated and unscrupulous lenders whose inappropriate dealings caused financial hardships. Today, non-bank lending is vital and secure.
Private lending plays a crucial role in the Australian property development industry and continues to enjoy significant growth. Additionally, non-bank lenders in Australia are regulated by the Australian Securities and Investments Commission (ASIC). The commission requires non-bank lenders to be upfront with rates and fees. As an investor, you will have access to the information you need.
There are numerous differences between securing a loan with a bank and a private lender. You must consider these before you decide who you will work with for your loan.
Approval Criteria, Flexibility, and Credit Checks
- Banks operate under strict government regulations. You fill in the requested information, and the algorithm determines if you should get the loan or if you should be rejected.
While information like a job or the amount of money you owe on other debts is a factor, your credit check has significant weight in the approval process.
- Private lenders have greater flexibility with their decisions about loan criteria. While you still need to provide personal information on your application, your acceptance or rejection is not hinging on your credit score. A private lender will see you as more than a number.
This difference becomes more important when you are someone struggling to get loan approval. While you may have poor credit, you likely have a reason. Perhaps you went into debt helping a family member, or large, unexpected bills arrived. There are reasons behind the numbers on loan applications, and private lenders consider these reasons.
Interest Rates and Fees
- Banks are looking for quantity when it comes to loan applications. If you can meet their requirements on paper, you receive the loan. Processing many loans means banks can afford to charge lower interest rates and charge lower fees.
- Private lenders are not in the high-volume loan business. As a result, they risk more when offering you a loan than a bank does. To protect themselves, non-bank lenders will charge higher interest rates, and you can expect to pay more fees.
Weighing the interest rates and fees is essential. If you have a good credit history, you can likely get bank approval for your loan. In this case, the bank could be your best choice. However, someone with a poor credit score may not find financing from a bank. It would be in your best interest to work with a private lender so you will have your loan.
Security and Collateral Requirements
- Banks operate with fixed requirements based on your loan and your credit history.
- Private lenders are flexible with what you may use as collateral. They will weigh if and how much you need to provide, and potentially, your interest rate may lower based on how much collateral you can offer.
- Typically, banks are not flexible with their repayment terms. You will receive your repayment schedule highlighting how much to pay and when to pay it to your bank. Depending on the bank, you may find flexibility regarding extra payments or frequency of payments.
- Private lenders can work out a repayment schedule that will work for you. Make no mistake about it. Non-bank lenders want their money back. However, they can arrange repayments that will fit into your financial world.
Banks are not geared towards personalised, flexible terms. You owe a specific amount, and you have a timeframe for repayment. Private lenders look at the various factors in your life throughout the loan process, including the details of your repayments.
The Role of Personal Relationships in the Loan Process
There are advantages to having a personal relationship with your private lender. You may have a loan from a bank, but that is not the same as having a personal relationship.
When you share your financial goals and plans with your private lender, they can help you by being tuned into what you need. Whether you want to buy an investment property or you need a loan for another reason, a good private lender will know what can work for you and steer you away from products that will be less useful. You can reap many rewards by working with someone who understands you and sees you as a person, not a number.
As you consider the contrasts involved in private lending vs. bank lending, it is essential to note the key differences between the two.
- An easier and faster approval process
- Flexible terms
- Several customisable loan options
- Cost more than banks
- Higher interest rates
- A rigorous approval process that includes your financial history and credit audit
- Less flexibility because of significant government regulations
- Limited loan options due to regulations
- A much slower process
- Typically, less expensive than private lenders
- Frequently have lower interest rates
It is vital that you carefully consider your needs and circumstances before you decide how you will finance your loan. Remember, non-bank lending and bank lending have unique pros and cons. Take the time to ask questions and determine which lender will serve you best.
There is no single best answer when you are weighing your options regarding bank lending vs. private lending. Your loan needs and financial situation are unique, and taking the time to research is your best strategy. You may benefit from consulting with financial professionals before deciding. You can find the expert assistance you need by contacting Quantum Capital. Our experienced team can highlight vital information to help you make an informed decision.