Introduction
Private lending has become increasingly popular for borrowers looking to secure financing in Australia. As traditional banks tighten lending criteria, private lenders are stepping in to fill the gap and provide an alternative source of funds. This article explores the rise of private lending in Australia, its benefits, and what borrowers should know before turning to a private lender.
The Growth of Private Lending
Private lending, also known as non-bank lending, has experienced rapid growth in Australia over the past decade. Following the global financial crisis, banks significantly tightened lending policies, making it harder for many borrowers to qualify for finance. This created an opportunity for private lenders to cater to underserved segments. Research shows that the value of new private lending grew at an average annual rate of 22% between 2010 and 2018.
Several factors have fueled the growth of private lending in Australia:
- Tighter controls on credit by significant banks
- Increased regulatory oversight of traditional lenders
- Higher capital requirements imposed on banks
- Banks’ reduced risk appetite for specific borrowers and loan types
- Greater demand for alternative financing sources by borrowers
Private lenders’ flexibility and niche focus have made them well-placed to exploit these market dynamics. They can often approve loans faster than banks, and tailor solutions to suit individual borrower needs.
Benefits of Private Lenders
Private lenders offer several potential benefits for borrowers compared to traditional banks:
A more comprehensive range of lending criteria
Private lenders employ more flexible lending criteria. They may accept higher debt-to-income ratios, stated incomes, poor credit history, or non-conforming collateral that banks would reject. This provides financing options for those who need to meet narrow bank criteria.
Faster approval times
Private lenders’ application and approval processes are often much quicker than banks, sometimes taking just days or weeks rather than months. Their direct lending model avoids cumbersome bank processes.
Lower documentation requirements
Borrowers can access private finance with fewer financial documents and statements required. This helps those who need help to document their financial position fully.
Specialised loan types
Private lenders cater to loan types that fall outside traditional bank lending. These include bridge loans, construction finance, asset-backed lending, and loans for foreign buyers. Their flexibility facilitates niche and complex borrowing needs.
Relationship-based lending
Private lenders often take a more personalised, relationship-based approach to lending. They look beyond financial documents to consider borrowers’ unique situation and repayment capacity. This empowers borrowers.
Types of Private Lenders
There are several categories of private lenders in Australia to suit different financing needs:
Private mortgage lenders
Lend for residential and commercial mortgages. They may be unregulated or members of an industry association. Often lend to borrowers with complex situations.
Peer-to-peer lenders
Facilitate loans funded by a pool of retail investors. Expand access for borrowers with online, automated models.
Asset-based lenders
Provide loans secured against an asset or business rather than income and used for specialised business or personal lending.
Finance brokers
Facilitate access to private lending products but don’t lend their funds. Useful to find the most suitable personal loan.
The Application Process
While every private lender will have a unique process, there are some common steps when seeking and applying for personal finance:
- Research lenders and products to find the right fit
- Check licensing and reputation of shortlisted lenders
- Speak to the lender to discuss requirements and obtain a pre-approval letter
- Submit a complete application with financial details as required
- Allow lender to verify application details and perform due diligence
- Provide any additional information requested by the lender
- Wait for formal approval of the loan and issuance of offer documents
- Review the offer thoroughly and sign acceptance if satisfied
- Wait for the lender to settle the loan and transfer the approved funds
It is advisable to be transparent and responsive throughout the process to facilitate approval.
Risks and Drawbacks
While beneficial in many situations, private lending also comes with some downsides to consider:
- Higher interest rates and fees than banks
- Lack of regulation around some private lenders
- Potentially onerous terms and conditions
- Higher default risk for lenders means more stringent credit checks
- Limited options if unable to repay the loan
- Repayment challenges if secured against the main home
Thorough research and due diligence are vital before committing to mitigate these risks.
Conclusion
Private lenders in Australia has exploded in Australia due to tighter bank lending and growing financing needs unmet by traditional channels. Private lenders provide invaluable alternative funding for borrowers not well-served by central banks. Their flexibility, niche focus and streamlined processes help drive access to capital. However, the higher costs and risks mean borrowers should research thoroughly and read the fine print before proceeding. With the right private loan product, many Australians can unlock financing opportunities that may have been previously out of reach.
