A non-bank lender is a less common alternative to traditional bank lenders. Though they’re not as prevalent as they once were, they give borrowers more options when it comes to finding the type of loan they’re looking for, whether they’re financing a home or taking on a new line of credit.
Borrowers from all backgrounds and with a variety of credit scores use non-bank lenders. Because your credit rating is extremely important when qualifying for a traditional bank loan, a non-bank lender might be a tempting choice, especially if you have no credit history or poor credit.
With more and more people considering new lines of financing and credit, it’s essential to know what option is the best value for you. In this guide, we’ll explore whether you should use a non-bank lender.
What Is a Non-Bank Lender?
First, let’s define what a non-bank lender is in Australia. These are lenders who don’t hold an Australian banking licence. They’re also not a mutual, building society, or a qualified credit union.
Where do these lenders get their funds? They source their funds themselves, and they lend these funds to borrowers to earn a profit on the difference.
How do these non-bank lenders differ from traditional banks? Traditional banks are regulated by Australia’s Prudential Regulatory Authority (APRA). This means they’re authorised to accept deposits from consumers, and they face ongoing regulation to make sure they’re following legal guidelines.
While it’s often thought that traditional banks are more secure, especially for home loans, this isn’t necessarily true. The mortgage and loan industry is evolving rapidly, and non-banks are equally as competitive today. Because they face fewer regulations, you might be able to find more flexible terms or a more competitive rate from a non-bank lender.
Why Choose a Non-Bank Lender?
There are many instances where it makes financial sense to choose a non-bank lender. While you should always do your research before agreeing to a new loan, especially a large loan, it’s important to understand all of your options.
Here are some of the pros of choosing a non-bank lender:
- Competitive rates – The most common reason to choose a non-bank lender is because they often offer competitive interest rates and fees. Because they have fewer overhead costs than traditional lenders, they can afford to be more competitive.
- Customer service – While traditional banks have more red tape and hoops to jump through to get things done, these regulations don’t exist for non-bank lenders. That means you can usually find a more customised, hands-on service.
- Lenient lending – Lastly, non-banks are often open to a wider range of borrowers, even those with poor or no credit.
If you don’t have a high credit rating or you don’t have any credit at all, it can be a practical choice to go with a non-bank lender. Similarly, if you find a great deal from a trusted non-bank lender, this could be a compelling option.
When Not to Choose a Traditional Bank
There are still many instances when it’s a better, more secure choice to choose a traditional bank. While it’s true that non-bank lenders can be trusted, secure, and competitive, there are still a lot of differences compared to a traditional, regulated lender.
Here are some of the cons of a non-bank lender:
- Limited refinancing – It’s more difficult to refinance a non-bank loan through a regulated lender, and this could leave you trapped in a long-term loan you can’t afford.
- Fewer features – Because non-bank lenders are usually smaller, they have fewer product features like no offset account. While this isn’t always true, it’s something to keep in mind.
- Higher fees – Some non-bank lenders offer higher upfront fees to set up your account, so always read the fine print.
- Unsecured funding – Though unlikely, there is still always a chance that the funding sources for non-bank lenders will dry up in the future. Your loan could also be sold to another lender.
If you have a fair credit rating or higher, you likely will qualify for better deals with a traditional bank compared to a non-bank lender. While you should still consider the bigger picture, traditional lenders are usually a better fit for those in good standing with their credit.
Choose the Right Lender for You
As you can see from the guide above, there are instances when it’s worthwhile to use a non-bank lender. These lenders have come a long way in the past decades, and they can be a secure, trusted option in the right situation. They’re particularly useful for those who have a limited credit history and are looking for competitive rates.
Before you agree to any new loan, talk with our experts on 1300 368 322. The professionals at Debt Busters can guide you to the right solution for your individual needs. Contact our team today to get started. We’re here to help you.