Choosing the right lender to suit your borrowing needs can be a tricky decision and it isn’t always as straightforward as it seems. Both options come with their own pros and cons that will very much depend on your individual financial circumstances. When it comes to private lenders vs banks, you should seek to determine which lending entity will offer a loan which is more tailored to your financial needs and understand what each one offers before making a decision.
What is the difference between private lenders vs banks?
Private lenders are normally referred to as non-bank lenders and are known for being more flexible than banks with their lending terms. Depending on the circumstances, they are more likely to offer a loan to those who have been turned down from a bank on the condition that they consider the borrower’s history and ability to repay.
Contrary to popular belief, private lenders are required to abide by the same laws, regulations and rules as banks. This means when you are choosing between a private lender or a bank, you are protected in both scenarios. Commonly, a private lender will not offer a loan to an individual borrower who is governed by the National Credit Code but will do so to a company or trust.
On the other hand, banks are termed “traditional lenders”, as they tend to be considered the “safer option” and the more reliable of the two. However, this developed sense of stigma surrounding banks is not always true.
Despite the loan process via bank creditors being generally regarded as a fairly straight forward transaction through a regulated set of conditions, it does not offer nearly as much flexibility as a private lender. Banks can often reject the borrowers’ application based on their credit score and don’t usually take into consideration the borrowers’ personal situation in the process of the application. Their rules are a lot more rigid and they would conservatively take on lesser risks.
Pros and Cons
Private Lender Pros:
- They offer competitive rates and more convenient loan offers (even if the borrower has no borrowing track record);
- The lending criteria are more flexible;
- They consider your personal needs and can allow for “high risk” borrowing; and
- Loan approval has a quicker turnaround time.
Private Lender Con:
- You need to do your due diligence: borrowers often fall into the trap of using these services which can sometimes be onerous if the agreement in place between borrower and private lender is not well understood.
Bank Pros:
- Bank loans often come with a lower interest rate (as they usually do not approve “high risk” loans);
- May offer special rates or benefits to existing bank customers such as loyalty and premium services; and
- May offer proprietary and niche-specific loan programmes.
Bank Cons:
- They generally have less flexibility when offering a loan;
- Stricter banking and lending standards;
- Longer closing times;
- The procedure can be quite lengthy with often no guarantee at the end that the loan will be approved meaning borrowers are often left to start from scratch;
- Banks are also generally more heavily regulated and rely heavily on a borrower’s credit score;
- More fees due to increased compliance requirements; and
- Cross-selling of additional banking products.
So, which lender is better for? Ultimately, the decision comes down to the borrower and their individual financial circumstances. It also depends on what type of loan is required and the security options.
Loan Application Process
The loan process is quite similar between private lenders and banks however the key difference is the turnaround period.
The usual loan application process is:
- All applications made will require supporting documents;
- There will be qualification guidelines to read ahead of applying;
- Borrowers can negotiate with the lender; and
- Loan contracts are drawn up after the valuation report, risk assessment and due diligence results are satisfactory to the lender.
Low Credit Score
One of the main differences between banks and private lenders is the impact a borrower’s credit score has on whether or not they can take out a loan in the first place. A low credit score doesn’t necessarily make a bad borrower.
The difference is a bank won’t normally consider unexpected or special circumstances and they often follow a set procedure regardless of the borrower’s background and life circumstances. They often see borrowers as a number and make a decision based on risk and liability of granting the loan to the borrower. On the other hand, private lenders have a lot more flexibility as they normally consider individual circumstances and tailor a loan to suit those needs. This presents more freedom when taking out a loan however the trade-off is higher interest rates, therefore the pressure on the borrower to make loan repayments on time is higher.
