Non-Banks vs Private Lenders: Know What You’re Dealing With
The world of lending is evolving rapidly in Australia, with non-bank and private lenders becoming increasingly prominent as traditional banks tighten their lending criteria. But while these alternatives offer flexibility and speed, they also come with unique risks and regulatory nuances. Here’s what you need to know to make informed decisions, based on insights from industry leaders and the Mortgage and Finance Association of Australia (MFAA).
Why Are Non-Banks and Private Lenders Gaining Ground?
Following the Global Financial Crisis and the Banking Royal Commission, banks have faced stricter regulations and have become more conservative in their lending. This has left a gap in the market, particularly for borrowers who don’t fit the traditional mold—such as those needing non-conforming loans or bridging finance for property transactions.
Non-bank and private lenders have stepped in to fill this gap, offering:
- Tailored loan structures
- Flexible repayment terms
- Faster approval and execution times
However, with this flexibility comes a need for greater caution and due diligence.
Understanding the Key Differences
Despite often being lumped together, non-bank lenders and private lenders are quite distinct:
| Aspect | Private Lenders | Non-Bank Lenders |
| Who | Individuals, small groups, boutique funds | Licensed financial institutions (not banks) |
| Regulation | Light or none; may not require a credit license | Regulated by ASIC; must hold an Australian Credit License (ACL) |
| Oversight | Limited consumer protections | Must comply with responsible lending laws |
| Funding | Personal or pooled private funds | Institutional capital, securitization |
| Loan Size | Small to medium | Medium to large |
| Loan Types | Short-term, bridging, asset-backed, niche | Home, personal, car, asset finance, commercial real estate |
| Approval Speed | Very fast (sometimes hours) | Fast, but more formal processes |
| Interest Rates | Higher, to offset risk | Competitive, slightly higher than banks |
| Risk Tolerance | High; often unconventional borrowers | Moderate; near-prime or non-standard borrowers |
| Protections | Few; buyer beware | Broader product range and regulatory protection |
Risks and Regulatory Issues
The MFAA and ASIC have both raised concerns about the lighter regulatory environment in which many private lenders operate. Private lenders may not be bound by the National Consumer Credit Protection (NCCP) Act, and may not even hold an ACL. This means:
- Less oversight
- Fewer consumer protections
- Higher risk of hidden fees or unfavorable contract terms
As a result, brokers and borrowers must be extra vigilant when dealing with private lenders.
Due Diligence: What to Watch For
The MFAA’s National Equipment and Commercial Finance Forum (ENCF) recommends the following steps:
- Vet the lender thoroughly
- Check their track record, dispute processes (like AFCA membership), and funding stability.
- Check documentation carefully
- Look for hidden fees, one-sided clauses, and rollover conditions.
- Clarify the total cost
- Consider all associated fees and charges, not just the interest rate.
- Ensure client understanding
- Explain the risks and lack of consumer protections, and get written confirmation.
- Document everything
- Especially how the loan meets the client’s needs under Best Interests Duty.
- Plan for an exit strategy
- Assess the client’s ability to repay or refinance.
- Consult your aggregator
- If a lender is off-panel, apply extra scrutiny and seek support.
The Bottom Line
Non-bank and private lenders are vital players in Australia’s lending landscape, especially for borrowers who can’t access traditional bank finance. However, the flexibility and speed they offer come with increased responsibility for both brokers and borrowers to understand the differences, risks, and regulatory protections (or lack thereof).
Education is key:
Always ask the right questions, read the fine print, and never assume that a business loan structure automatically removes consumer protections. With ASIC increasing its oversight, holding yourself to the highest standard is the best way to protect your clients—and your business.
Further Reading
For more details and the latest updates, read the full article on MPA Magazine Australia.
