Private lending, all you need to know

Traditionally, if borrowers needed a loan, they went to a bank as it was the only option available. Today, private lenders are a real alternative to traditional banks and have created a competitive framework. In fact, there has been a significant spike in demand for non-bank lending from brokers and borrowers to fill the void left by the banks, which are tightening their lending criteria. In this page, we will go through the main key points to understand the private lending market.

What is Private Lending?

Private lending refers to the monetary funding given to an individual or company by a private individual or organisation that has access to a pool of private funds. It differs from traditional bank lending as it often has non-traditional qualifying guidelines. Individuals may turn to private lending when they are finding it difficult to get finance from traditional lenders due to bad credit history or even simply being a highly-leveraged property investor.

What are the key benefits of private lending?

Quicker settlement

If you are short of time and need a loan ASAP, the approval process for private loans are faster and do not involve as much paperwork.

Specialised loans

Private lenders often cater for a range of loans and do not stick to the strict rules of traditional funding, this may be beneficial for borrowers seeking short term finance.

Having a good credit history may not be necessary

Many borrowers are rejected from banks for having below average credit history. Some non-bank lenders are more lenient and are willing to negotiate terms.

Easy approval

Non-bank lenders specialize in offering loans to borrowers in unique circumstances. If you have bad credit history for example or can not prove your income via documentation, private lenders may be able to offer you a solution.

What are the potential risks of non-bank lending?

Higher interest rates: Due to the higher risk that borrowers with below average credit scores have, interest rates tend to be higher.
Lack of features: Private lending generally does not offer any many features as traditional funding.
Shorter term loans: Private mortgage loans are only meant to fill the gap between securing additional finance or to fund short term problems such as buying a new house and selling an existing property. Traditional mortgages on the other hand are usually 25 to 30 year terms. Due to this, private home loans are generally offered for 3 to 12 months, with some going up to 2 years.

What are the four main types of home loans offered by private money lenders?

Bridging loans

Bridging loans are short term loans that are taken out to buy a new home before selling an existing property. These often have higher interest rates and are interest only loans that are repaid after the property has been sold.

Caveat loans

Caveat loans are loans secured by a caveat against your existing property. It is a good way to get urgent access to funds and are generally for only two or three months. They do have higher interest rates and the private lender usually decides how you can repay the funds before approving the loan e.g. a planned sale of your property.

Bad credit loans

Bad credit loans are usually sought out by borrowers who have bad credit history in their country. Poor credit can be due to a variety of reasons, such as not paying bills on time, or defaulting on monthly repayments of their home loan. Poor credit loans are often used for debt consolidation. By having a below average credit history, lenders will perceive you as a high risk borrower when it comes to missing repayments and falling into arrears. Due to this, bad credit home loans typically have greater interest rates, mainly to offset the increased risk to the lender. Bad credit loans vary but they are usually short-term and fixed, which gives the borrower an opportunity to repair their credit history.

Second mortgages

A second mortgage loan occurs when an individual already has a mortgage on an existing property but decide to take out an additional loan on the same property. Often, these types of mortgages occur when parents want to help their children buy their first time. The greatest risk of second mortgage loans is centered around the fact that if you were forced to sell your property, you may still owe money on the second mortgage. For this loan specifically, the first mortgage must be paid back before any money goes towards repaying the second mortgage.

What is a low-doc private loan?

A low doc private loan is a loan that doesn’t ask for as much paperwork as banks usually do. Generally, banks will require the borrower to provide them with tax returns and other financial papers in order for them to assess your situation and how likely you will be able to make repayments. This is a major barrier for those individuals who are self-employed, which is why low loc private loans are the most suitable for them.

What is a private loan broker?

A private loan broker is an individual who finds and secures loans on your behalf, acting as an intermediary between you and your chosen private lender. Having a private loan broker gives you the advantage of getting the right loan, tailored to your personalised needs and circumstances. These brokers often have an established network of private lenders who they are familiar with and with their specialised knowledge, are able to streamline the whole borrowing process, essentially taking the stress out of the tricky process. However, nowadays, there are online private lending platforms which help you to connect with the right non-bank lender suited to your requirements as well as reduce intermediary costs.

What are the regulations of non-bank lending?

Often people think banks are safer when it comes to borrowing due to the high amount of government scrutiny and regulation they are subjected to, but the reality is that private lenders in Australia must also comply with extensive legal and industry codes. Some of these include: Australian Consumer Law, ASIC laws, National Consumer Credit Protection laws, Privacy Law and the ePayments Code. The only difference between private lenders and banks is that banks are subject to an additional layer of regulation; the Australian Prudential Regulatory Authority (APRA). The non-bank lending sector is actually self-regulatory in some aspects as it only rewards lenders who have the highest levels of quality and service through industry award nights.

How to find the best non-bank option for yourself?

ADS.finance is the only platform in Australia to access the private lending market on one site. Our new technology allows borrowers and brokers to establish direct contact with private lenders who express interest in their loan scenario. With 500+ private lenders registered on the ADS.finance, there is a high rate of contact between borrowers/brokers and non-bank lenders. Apply now for a private loan, obtain pricing and terms from multiple non-bank lenders tailored to your specific requirements, compare offers and choose the right non-bank lender to fund your private loan.