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Private Lending vs. Bank Loans in Australia: Which is Right for You?

Updated: May 17, 2023

When it comes to securing a personal or business loan, we normally go to traditional banking institutions. However, getting the loan approval may not come that easily so we try for alternative sources of quick funding from private lenders. Both have advantages and disadvantages so choosing the right one for our needs requires careful consideration.


Private lending has become increasingly more popular than most big banks and credit unions in recent years, especially for short- and long-term business loans, personal loans, and real estate funding solutions.


How does private lending work?

The reason for its tremendous growth is that borrowers can obtain financing despite poor credit scores. These private lenders are willing to work with borrowers who have bad credit or don't meet the strict requirements of traditional bank loans. More importantly, they also offer greater flexibility and faster loan approval processes, something most borrowers would find attractive. On the flip side, it might work against borrowers in some cases due to the lack of regulation and limited loan options.


Private Lending in Australia

Australia's loan market is worth about A$2.85 trillion, while the corporate loan market is worth about A$1 trillion. Loans to the private sector have amounted to over A$1.21 trillion as of January 2023 with an interest rate of 3.6%. There is a shift away from the big banks as traditional loan providers with non-bank lenders providing more attractive risk-adjusted returns. Such a shift is attributed to regulatory pressures that forced banks to rethink their lending practices through the Basel Committee on Banking Supervision (BCBS) capital requirements, Australian Prudential Regulation Authority (APRA) oversight, and the Royal Commission into financial services.


Macquarie Capital sees two trends contributing to private lending thriving and growing even in volatile markets:

✅ the post-pandemic world provides greater opportunities for the private lending sector looking for debt to fund acquisitions

✅ sponsors and borrowers are increasingly looking for longer-term partnerships with private credit solutions offering additional flexibility, reliability, and quick execution


Pros of Private Lending

As private lending has become popular in Australia, many have borrowed money from private lenders or investors for quick cash.


1. Short-Term Loans

These loans can be approved within 24 hours, making them an excellent option for borrowers who need immediate funding.


2. Business Loans

Private lending can be an excellent option for small businesses that require quick financing without the strict requirements of traditional bank loans. Various loan options make it easy for businesses to obtain funding solutions that meet their unique requirements.


3. Personal Loans

Personal loans offer more flexible terms and interest rates than traditional banks. This makes private lending a viable option for borrowers with poor credit scores.


4. Real Estate Funding

Real estate investors would find private lending as an ideal funding option for their projects.


Cons of Private Lending

Even though many people are choosing private lenders for their funding needs, there are some things you may have to consider before getting loans.


1. High-Interest Rates

Private lenders tend to charge higher interest rates than traditional banks to offset the higher risk of lending money without strict requirements.


2. Limited Loan Options

As compared to big banks, private lenders offer limited loan options thereby making it difficult for borrowers with unique loan requirements to find suitable funding solutions.


3. Lack of Regulation

As private lending is not as strictly regulated as big banks, it may pose risks to borrowers who do not conduct proper due diligence.


Things to Consider

There are three things to consider when choosing private lenders over big banks when it comes to your funding needs.


1. Credit Score

Private lenders tend to be more flexible with borrowers' credit scores. However, borrowers with better credit scores may be eligible for lower interest rates and more favourable loan terms.


2. Loan Requirements

Although borrowers need to provide income and identification verification, there are far fewer loan requirements in private lending than in traditional bank loans. More importantly, there is no need to provide a more extensive financial history or collateral.


3. Quick Approval

Borrowers would find it easy to gain quick loan approval especially when there's immediate cash out for that much-needed funding.


Bank Loans in Australia

Most Australians get traditional bank loans from the four largest banks in the country, known as the "Big Four." These banking institutions dominate the market - Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ), and National Australia Bank (NAB).


Figures have shown that the Big Four control over 82% of all loans in the country for a total of A$1.3 trillion with CBA (including Bankwest) leading the way with A$411.4 billion in gross loans or 26.1% of the market share.


The remaining market share is held by smaller banks, credit unions, and non-bank lenders who provide alternative financing options, such as private lending, personal loans, and short-term loans. While these options have become increasingly popular in recent years, the Big Four still dominate the market, especially long-term loans and mortgages.


The dominance of the Big Four banks has led to concerns about a lack of competition and potential risks to the country's financial stability. In response, the Australian government has implemented various regulatory measures, such as the Banking Executive Accountability Regime (BEAR) and the Financial Sector Reform (Hayne) Royal Commission, to increase competition and improve accountability and transparency within the banking sector.


Pros of Bank Loans

There are clear benefits to seeking traditional banks for reliable financing for personal expenses, business operations, or real estate investments.


1. Lower Interest Rates

Bank loans are known for their low-interest rates, which makes them a cost-effective option for borrowers. The interest rates for bank loans are generally lower than those offered by private lenders, especially for borrowers with good credit scores.


2. Greater Loan Options

Banks offer a wide range of loan options that allow borrowers to choose the loan that best suits their needs.


3. Customer Support

Banks typically provide customer support services to borrowers, which can be beneficial for those who need assistance with the loan application process or have questions about their loan terms.


Cons of Bank Loans

If you’re looking for quick and easy funding, getting a bank loan is not the ideal choice especially when you have a poor credit score.


1. Strict Loan Requirements

It is difficult for some borrowers to qualify for a bank loan as the requirements typically include a high credit score, proof of income, and collateral for secured loans.


2. Long Approval Processes

Unlike private lenders, banks have longer approval processes that can be frustrating for borrowers who need quick funding, especially for commercial property loans or other complex long-term loans.


3. High Credit Score

Borrowers are required to have a high credit score to qualify for a loan, which can be challenging for those with poor credit history.


Things to Consider

There are three things to consider when choosing big banks over private lenders when it comes to your funding needs.


1. Commercial Property Loans

Banks offer commercial property loans for businesses looking to purchase or refinance a property. These loans typically have longer repayment terms and lower interest rates compared to private lenders.


2. Property Loans

Banks also offer property loans for individuals looking to purchase or refinance residential properties. These loans may have lower interest rates than private lenders, but borrowers will need to meet strict application requirements.


3. Caveat Loans

Banks offer caveat loans, which are a type of secured loan that uses the borrower's property as collateral. These loans typically have lower interest rates than private lenders, but borrowers risk losing their property if they are unable to repay the loan.


Key Takeaways

When choosing between private lending and bank loans, borrowers have to find that balance between their strengths and weaknesses so they can decide on the best financing option for their needs.


✅ Private lending is an alternative to traditional bank loans that can provide short- and long-term loans.


✅ Private lending has advantages such as fast approval processes, fewer application requirements, and flexibility, but it also has disadvantages such as higher interest rates, limited loan options, and possible lack of regulation.


✅ Bank loans offer lower interest rates, more loan options, and possible customer support, but they also have disadvantages such as strict loan application requirements, longer approval processes, and possible credit score requirements.


✅ Big banks offer stability, a wide range of loan options, and an established reputation, while private lenders offer personalized attention, flexibility, and possibly bad credit options.


✅ When deciding between private lending and bank loans, it is important to consider factors such as credit score, loan application requirements, funding solutions, and the type of loans needed, such as commercial property loans, property loans, and caveat loans.


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