Banks vs Private Lenders – Who should you choose

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, the recommended option is to do your research 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.

Here is everything you need to know when it comes to private lenders vs banks.

What is the difference between private lenders vs banks?

Firstly, learning the difference between private lenders vs banks is always a good start to ensure you understand the concept between the two.

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 private lender vs bank, you are protected in both scenarios. Commonly, private lender will not offer a loan to an individual borrower who is governed by the National Credit Code but to a company or trust.

On the other hand, banks are often known as traditional lenders, they tend to be considered the “safer option,” and or go-to for most people as they are considered the more reliable of the two. However, this developed sense of stigma surrounding banks is not always necessarily true.

Despite the loan process via bank creditors are generally regarded as a fairly straight forward transaction through a regulated set of conditions, it does not always offer nearly as much flexibility as a private lender. Banks quite 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.

The Pros and Cons

When considering which was to go and deciding between the bank vs private lenders, it is important to consider the pros and cons and these can vary depending on your personal circumstances.

Private Lenders' Pros:

  • They offer competitive rates and more convenient loan offers (even if the borrower has no borrowing track records);
  • 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 Lenders' Con:

  • You need to do your due diligence: borrowers often fall into the trap of using these services and the implications can sometimes be onerous if you do not understand the agreement in place between you and your private lender.

Banks' 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.

Banks' 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 the implications of this is that borrowers are often left to start from scratch;
  • Banks also have stiff regulations and rely heavily on your credit score;
  • More fees due to increased compliance requirements; and
  • Cross-selling of additional banking products.

So, the key question left for every reader is to consider which lender is better for me when it comes to lending? Ultimately, the decision comes down to you and your individual financial circumstances. It also depends on what type of loan you are taking out. From mortgages through to personal loans.

Taking Out A Loan

The loan process is quite similar between private lenders and banks however the key difference is the turnaround period.

A loan process is as follows:

  • All applications made will require supporting documents;
  • There will be qualification guidelines that you can read ahead of applying;
  • You can enter into negotiation with the lender; and
  • Loan contracts are drawn up after inter alia, 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 your credit score has on whether or not you can take out a loan in the first instance. A low credit score doesn’t necessarily make you a bad borrower. Life is unexpected and bills can crop up all the time, from finding yourself in a car accident to hail damaging your car and currently particularly following the implications of Covid-19, our economic climate has seen some drastic changes.

The difference is a bank won’t normally consider these circumstances and they often follow a set procedure regardless of your background and life circumstances. They often see borrowers as a number and make a decision based on how risk and liability of granting the loan to the respective borrower. On the other hand, private lenders have a lot more flexibility as private lenders normally consider your individual circumstances and can tailor a loan to suit your needs. This presents a lot more freedom when taking out a loan however the risk is a lot higher particularly with regard to higher interest rates, therefore the pressure on the borrower to make loan repayments on time is a lot higher.

At the end of the day, both banks and private lenders come with their own advantages and disadvantages. If you find yourself in a position of low credit score and are unable to take out a bank loan, then the flexibility of a private lender could be well worth it to be considered provided you do your research first. Private lending also opens up more avenues when it comes to taking out a loan and offers a more personalised experience.

Two of our senior lawyers and firm principals Meghan Warren and Kristy Muhlhan have over 23 years of experience between them in banking, finance, commercial and construction industries.  For tailored legal advice and guidance please contact either Meghan or Kristy via phone on +61 3 9833 8588 or email our team here.  Find out more about our Banking and Finance legal services here.

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