Private Lenders vs Banks: When Private Finance Makes Sense

Key takeaways

• Speed and flexibility are the product; price is the cost of them.
• Terms are usually short - three to twenty-four months - with a planned exit.
• Security and the exit strategy matter more than your credit file.
• Always know how you are getting out before you go in.

Where private lending genuinely fits

• Settlement deadlines a bank cannot meet.
• Bridging where the existing property has not sold.
• Development and construction that falls outside bank appetite.
• Credit impairment or unlodged returns, where the security is strong.
• Unusual security - specialised commercial, rural, partly completed builds.

What it costs

Private lending is typically priced as a monthly rate plus fees, and quoted on the full facility rather than the drawn balance. Expect establishment fees, a line or management fee and legal costs, on top of an interest rate well above bank pricing.

Compare total cost over the actual expected term, not the annualised rate. A short, expensive loan that completes a profitable transaction can be cheaper than losing the transaction.

The exit is the whole deal

Private lenders lend against an exit: a property sale, a refinance to a bank, or project completion. Before signing, be able to answer:

1. What repays this loan, specifically?
2. What is the realistic timeline, and what happens if it slips?
3. What does an extension cost, and is it at the lender's discretion?
4. If the exit fails entirely, what happens to the security?

Borrowers get into trouble with private finance when the exit is optimistic rather than contracted.

Frequently asked questions

Are private lenders regulated?

Lending to consumers for personal purposes is regulated under the NCCP Act. Much private lending is business-purpose lending, which sits outside that regime - so consumer protections may not apply. Understand which you are entering.

How fast can private finance settle?

Days rather than weeks where the security is clean and legals move quickly. That speed is precisely what borrowers pay for.

Can I refinance from private to a bank later?

That is usually the intended exit. Build the timeline realistically - bank approval takes weeks, so start well before the private facility expires.

Related reading

• Big Four vs Regional Banks vs Neobanks vs Non-Banks
• Bridging Finance: Buying Before You Sell
• Bad Credit Business Loans: What Is Actually Available

Sources

• National Consumer Credit Protection Act 2009 — Federal Register of Legislation
• Borrowing and credit — ASIC Moneysmart