Non-Bank Lenders: What Are They?

When looking for financing, most people turn to banks. Here, they are met with endless requirements and documentation that most people, especially new businesses, don’t have. Non-bank lending alternatives have emerged to fill this void and increase the scope of lending and have grown in popularity, particularly over the last decade.

Non-bank lenders are more suited to provide bespoke loans to your circumstances and situations. They are flexible in their lending requirements, meaning more businesses and individuals qualify for the loans than traditional providers.

However, non-bank lenders are still shrouded in mystery, and borrowers approach them with much more caution and concern. Understanding how they work and their benefits might help lift the concern and equip you with vital information to help you better work with non-bank lenders.

What are Non-Bank Lenders?

Non-bank lenders are financing institutions or loan providers that are not traditional institutions such as banks, building societies or credit unions.

Non-bank lenders are common in both the home loan sector and the commercial marketplace. In the home loan sector they provide mortgages by sourcing wholesale funds and lending them to their customers. This contrasts with traditional lenders like banks that typically source their funds from customer deposits and wholesale funding. In the commercial sector, they provide a variety of finance options as a direct alternative to the banks.

Most non-bank lenders were established in the 1990s and early 2000s. Initially, it was increasingly difficult for the lenders to secure funding on the wholesale market for their loans. Over time, the lenders acquired funds, and their popularity grew. They remain a viable option for Australians looking to take out a loan.

What Types of Loans do Non-Bank Lenders Offer?

Non-bank lenders specialise in the home loan market. However, others also provide other types of funding for cars and businesses.

The lenders often cater to borrowers and sections of the market that are underserved by traditional lenders. They also lend for residential and commercial construction and to self-managed super funds.

Regulation of Non-Bank Lending

The regulation of the banking industry is one of the reasons borrowers trust and prefer bank lending. Banks are perceived as safer because of the high amount of government scrutiny and regulation they are subjected to.

Non-bank lenders are also subjected to various intensive legal and industry codes. These include ASIC laws, National Consumer Credit Protection Laws, Australian Consumer Law, Privacy Law and the ePayments Code.

The only difference between the two entities is that banks are subjected to an additional layer of regulation administered by the Australian Prudential Regulatory Authority (APRA).

The non-banking lending sector also somewhat regulates itself by rewarding lenders who aspire to the highest levels of quality and service. The Non-Bank sector of the annual Australian Home Loan Awards is one of the fiercely contested awards available to non-banks.

These measures protect consumer interests and ensure you can access funding safely from non-bank lenders. Borrowers can work with a lender that best suits their circumstances by considering both options.

Benefits of Non-Bank Lenders

Lower Fees

Big banks have large overheads, huge staff numbers, and branches, which calls for higher interest rates and processing fees. This is not the case with non-bank lenders. They can lower their fees because they don’t have the same large operations. If you’re using a non-bank lender for your home loan, this may help to avoid a ballooning comparison rate.

Lower Interest Rates

Just like the fees, bank overheads also affect the interest rates. Non-bank lenders often look to shake up the loan market with competitive interest rates. Some non-bank lenders might have higher fees, so you should do your comparison and seek professional advice or consult a mortgage broker if you’re looking for more information.

Also, non-bank lenders may be slower to pass on rate rises from the Reserve Bank of Australia, although this is not always true.

Personalised Service

The Big Four banks are notorious for providing a rigid and universal customer experience. They are frowned upon because of the feeling of being disposable and anonymous in the seas of customers they have. With smaller customer pools, you’re more likely to get more customer attention and personalised service with a non-bank lender.

Faster Processing

Major banks have extremely bureaucratic processes requiring significant time to complete things. But non-bank and online lenders can process loan applications in record time, ensuring you get your loan in a matter of hours.

More Flexibility

Non-bank lenders will still check your credit history before approving your loan application. However, they are more flexible compared to traditional banks. They can benefit borrowers with lower credit scores or less documentation.

Downsides of Non-Bank Lenders

Lack of Offset Accounts

Traditional accounts are deposit-taking institutions that allow them to offer generous offset accounts on their home loan products. Non-bank lenders are ineligible to do so to the same extent.

Lack of Branches

Some customers appreciate walking into a banking hall and talking to a customer support representative face-to-face. This may not be a deterrent for younger first-home buyers. However, they desire to talk to a representative when they have a concern or a financial situation. Smaller non-bank lenders, particularly online lenders, have limited locations or no locations at all, which might concern some borrowers.

Less Trust

The greatest challenge non-bank lenders have is the reduced trust among borrowers. They lack the long-established reputations of the major banks in Australia. It’s easy to find yourself sceptical of them. Remembering the extensive regulations that add a safe diet for traditional banks is worth remembering. However, it is worth noting that even if your non-bank lender fails, they are most likely bought out by another financial institution, meaning you will still keep up with your repayments and be open for refinancing.

Is a Non-Bank Lender Right for Me?

A major decision is whether a non-bank lender is right for you. It’s a big enough decision to warrant seeking professional advice. You should not assume that a bank will give you a better loan option with lower interest rates. Some non-bank lenders might offer you better terms and are worth considering.