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What are non-Bank Lenders?
Did you know? Private lenders are also known as ‘non-bank lenders’.
When many people think of getting a loan, they often automatically think that applying to a bank is their only option. That’s long been the traditional way of getting finance. But it’s no longer the only (or the best) way.
Private (non-bank) loans are the other option, and more and more Australians are choosing to get this type of finance and the benefits that it provides.
So, what are non-bank loans? As the name suggests, they are loans provided by private individuals or organisations that aren’t banks. These loan providers are commonly known as ‘non-bank lenders’ or ‘private lenders’.
How Do Non-Bank Lenders Work?
Non-bank lenders work in a similar fashion to bank lenders, except for a few key differences:
✅ Faster application, approval and settlement than banks.
✅ They have less strict lending criteria.
✅ Their loan offer is more likely to be tailored to your specific needs.
✅ A more personalised level of service.
DEBUNKING 6 COMMON MYTHS ABOUT NON-BANK LENDERS
Myth 1: Private loans are against the law
Private loans are legal in Australia, as evidenced by the fact that they account for more than one in four loans according to 2018 research from PricewaterhouseCoopers Australia.
Private lending activity is also likely to increase due to the uncertain economic times ahead in Australia post COVID-19. That’s because the big banks are already tightening their credit policies and implementing even stricter lending criteria than they already had in place.
Private loans provide borrowers with more choice in the Australian lending market, as well as providing some ‘non-conforming’ borrowers with their only option of getting finance. A ‘non-conforming’ borrower is one who doesn’t meet the strict lending criteria of a bank or other major financial institution.
Myth 2: Private lenders are dodgy
False, provided that legal contracts are in place.
All DFS private loans are contracted loans. Our contract processes are extremely thorough and transparent to protect the rights of all parties.
Our contracts are prepared by Summer Lawyers, who are mortgage specialists based in New South Wales. Once a private loan contract is prepared for one of our clients, it is sent to their nominated lawyer for review. They can independently answer any loan contract questions that the borrower may have.
All of our DFS clients are advised to obtain independent financial advice prior to signing their private loan contract.
Once the private loan contract is signed by the borrower and received by us at DFS, we arrange for the loan funds to be transferred in one of two ways.
- Transferred from the private lender to the trust account of the borrowing client’s lawyer, and they can then be transferred to the borrower.
- Transferred directly from the private lender to the borrower.
Option 1 is the more common method of transferring private loans arranged by DFS.
Our DFS contracts clearly outline all loan terms and conditions, including the repayment schedule and interest rate.
Myth 3: Private loans are only for people with a bad credit history
While borrowers with a bad credit history can certainly get a private loan, many borrowers who have a good credit history also have a hard time satisfying the strict lending criteria of major banks. For example:
- Borrowers who are self-employed and who have a less stable or less secure income.
- First-time property developers who don’t have a track record of successful projects.
Myth 4: Private loans can only be used for a limited range of purposes
Private money lenders in Australia make loans available to clients for a wide range of purposes, as outlined in the section below.
In addition, one of the key benefits of private loans is that they are more likely to be tailored to your individual needs and circumstances than a typical ‘one-size-fits-all’ bank loan product. At DFS, we’ll take the time to understand your situation before matching you up with a suitable private lender.
Read more about DFS Non-Bank Private Lender loans.
Myth 5: You can’t get a private loan if you have a bad credit rating.
Although this may be true for some lenders, at DFS, we don’t conduct credit checks on our entire range of secured or unsecured private loans. So getting a loan even if you have a bad credit rating is still possible with DFS.
Myth 6: I don’t have documentation to prove all my income, so I can’t get a private loan.
Some lenders are strict and need documentation for all income. However, at DFS, we have minimal documentation requirements. For example, we don’t require tax returns and proof of sales invoices.
What different types of loans are offered by non-bank lenders?
Non-bank lenders offer a range of secured and unsecured loans. Secured loans have an asset that the borrower has offered as collateral security for the loan. For example, if you own real estate or have a level of ownership (equity) in a property, it can be used as collateral security for a private loan.
Unsecured loans, on the other hand, do not require you to provide any collateral security. However, it’s important to understand that if you can provide collateral security, you’ll usually be able to access better loan terms and conditions (for example, a lower interest rate from your private lender than you would be able to get with an unsecured loan).
Types of loans that we arrange at DFS include:
- Caveat loans.
- Property development finance.
- Short term business loans.
- Non-conforming loans.
- Bridging finance.
- Land acquisition/land bank.
- Equipment finance.
- Mezzanine funding.
- Second mortgages.
- Commercial property loans.
- Business purchase loans.
We’ll now look at some of these types of loans in more detail.
A caveat loan is a common type of secured loan and it’s one of the most popular options for our DFS clients. It involves providing a caveat against real estate that you own as security for the private loan. It’s important to understand that it’s not like mortgaging your property though.
Instead, when a caveat is put on your property, the caveat is registered with the government’s land title office in your State or Territory. This simply means that you can’t sell the property while the caveat is in place (unlike a mortgage where a lender can repossess and sell your property if you don’t make your loan repayments).
The property caveat is removed when the loan is fully repaid.
Property Development Finance
Property development finance in Australia is used for two main purposes.
1) To build or develop multi-residential properties (like apartment/unit complexes and townhouses).
2) To build or develop commercial (business) properties.
Short Term Business Loans
Short term business loans can be secured against property for a range of purposes, including:
- Working capital.
- Cash Flow.
- Getting the finance that you need to capitalise on urgent business opportunities.
Bridging finance is short-term finance that can cover the time between buying a new property and selling an existing one.
Equipment finance can allow you to take advantage of the instant asset write-off scheme. This scheme allows eligible businesses to immediately write off the cost of asset purchases (up to certain threshold values) as tax deductions.
The amount of tax that you can save under this scheme depends on two things:
- The value of the asset that you buy.
- The type of business structure that you have and the associated tax that you pay. If your business has a sole trader or partnership structure, you pay tax at your marginal rate. The amount of tax that you save will be your marginal rate multiplied by the value of the asset.
If your business has a company structure, you’ll pay tax at 27.5% if your annual turnover is less than $25 million. Again, the amount of tax you’ll save will be your marginal rate multiplied by the value of the asset.
Commercial Property Loans
Commercial property loans can be provided for you to buy a range of business properties, including:
- Retail shops or shopping centres.
- Office premises.
Why do people choose non-bank loans?
There are many reasons why people choose to take out non-bank loans with private lenders, including:
- They don’t conform to the strict lending criteria of banks. For example, they have no or bad credit history, or limited property development experience.
- They need short-term finance quickly. The bank approval process typically takes weeks, whereas loans arranged through DFS can be approved and in your account within days.
- Private finance providers are more likely to provide a loan tailored to your individual needs.
- Private lending brokers are more likely to provide you with personalised customer service.
How are non-bank loans funded?
Unlike bank loans, non-bank loans are not funded by deposits made by customers. Instead, they are individual contractual arrangements between a borrower and a third-party private lender. This lender could be an individual or an organisation.
At DFS, we act as a broker between our clients and our huge pool of private lenders. We match our lenders and clients based on their mutual needs.