Private Lending vs Bank Loans: Which is Right for You?

Private Lending vs Bank Loans: A Comprehensive Comparison

When you need funding in Australia, you have two main paths: traditional bank loans or private lending. Each serves different purposes and suits different circumstances. This guide breaks down the key differences to help you make an informed decision.

Speed of Approval and Settlement

Bank Loans

• Approval time: 2-6 weeks (often longer)
• Settlement: 4-8 weeks from application

• Process: Multiple stages of assessment, document verification, and committee approvals

Private Lending

• Approval time: 24-48 hours
• Settlement: 3-7 business days

• Process: Streamlined assessment focused on security and exit strategy

Winner: Private lending, by a significant margin. If you need funds urgently for an auction, business opportunity, or time-sensitive purchase, private lending is the clear choice.

Interest Rates and Costs

Bank Loans

• Interest rates: 6% to 8% p.a. (variable, 2025 rates)
• Establishment fees: Often waived or minimal

• Ongoing fees: $0 to $400 annually
• Total cost example: $500,000 loan over 5 years = approximately $90,000 in interest

Private Lending

• Interest rates: 9% to 16% p.a.
• Establishment fees: 1% to 3% of loan amount

• Ongoing fees: Minimal or none
• Total cost example: $500,000 loan over 12 months = approximately $60,000 to $80,000 in interest and fees

Winner: Banks for long-term borrowing. However, for short-term needs (under 2 years), the total cost difference narrows significantly when you factor in the opportunity cost of delays.

Lending Criteria and Documentation

Bank Requirements

• Full income verification (2 years tax returns, payslips)
• Clean credit history (defaults can disqualify you)

• Serviceability assessment (can you afford repayments?)
• Property valuation meeting bank criteria

• Genuine savings evidence
• Detailed purpose explanation

Private Lending Requirements

• Property valuation (primary focus)
• Reasonable loan-to-value ratio (typically under 75%)

• Clear exit strategy
• Basic identity and ownership verification

Winner: Private lending for accessibility. Banks reject many viable borrowers due to rigid criteria that don't account for individual circumstances.

Loan Terms and Flexibility

Bank Loans

• Term length: 5-30 years
• Repayment: Principal and interest (P&I) or interest-only for limited periods

• Early repayment: Often penalised with break fees on fixed rates
• Flexibility: Limited once approved

Private Lending

• Term length: 1-24 months typically
• Repayment: Usually interest-only with balloon payment

• Early repayment: Generally no penalties
• Flexibility: Terms can be negotiated and restructured

Winner: Depends on your needs. Banks suit long-term ownership; private lending suits transitional situations.

When to Choose Bank Financing

Bank loans make sense when you:

• Have time to wait for approval (no urgency)
• Need long-term financing (5+ years)

• Have clean credit and verifiable income
• Want the lowest possible interest rate

• Are purchasing a standard residential property
• Plan to hold the asset long-term

Example Scenario

Sarah wants to buy her family home for $800,000. She has a stable job, good credit, and 20% deposit. A bank loan at 6.5% over 30 years gives her manageable repayments of approximately $4,050 per month.

When to Choose Private Lending

Private lending makes sense when you:

• Need funds within days, not weeks
• Have been declined by banks

• Are between properties (bridging finance)
• Have complex income (self-employed, contractors)

• Need development or construction funding
• See an opportunity that won't wait

• Have equity but impaired credit

Example Scenario

Michael found an investment property at auction for $650,000—well below market value of $750,000. He needs to settle in 30 days but his bank needs 6 weeks. A private loan at 12% for 6 months costs approximately $39,000 in interest, but he gains $100,000 in instant equity. Net benefit: $61,000.

Combining Both Options

Many savvy borrowers use both:

• Start with private lending to secure time-sensitive deals
• Refinance to a bank once the dust settles

This strategy captures opportunities that bank timelines would miss, while minimising long-term interest costs.

Risk Comparison

Bank Loan Risks

• Interest rate rises on variable loans
• Property value decline affecting equity

• Income changes affecting serviceability
• Long-term debt commitment

Private Lending Risks

• Higher interest costs if you can't exit on time
• Shorter terms require clear repayment plan

• Property used as security is at risk
• Need to refinance or sell to exit

Regulatory Protections

Bank Loans

• Heavily regulated under NCCP Act
• Responsible lending obligations

• Hardship provisions mandatory
• External dispute resolution required

Private Lending

• Business-purpose loans have fewer protections
• Consumer credit must comply with NCCP

• Always verify lender's ASIC registration
• Less standardised processes

Making Your Decision

Ask yourself these questions:

• How quickly do I need funds? Urgent = private lending
• How long do I need the money? Long-term = bank

• Can I meet bank criteria? No = private lending
• What's my exit strategy? Clear exit = private lending works

• Am I comfortable with higher rates short-term? Yes = private lending viable

Frequently Asked Questions

Can I get a private loan if the bank rejected me?

Yes. Private lenders focus on property security rather than income verification and credit scores, so bank rejection doesn't automatically disqualify you.

Is private lending more risky than bank loans?

Both carry risks. Private lending's main risk is the shorter term and higher cost. Bank loans carry risks of long-term debt and rate changes. The right choice depends on your circumstances.

Can I refinance from private to bank lending?

Yes, this is common. Many borrowers use private lending as a bridge while arranging longer-term bank finance or selling a property.

What security do private lenders require?

Most private loans are secured by registered mortgage over real property. Some lenders accept commercial property, land, or development sites.

Conclusion

There's no universal better option between private lending and bank loans—only what's better for your situation. Banks offer lower rates but slower processes and stricter criteria. Private lending offers speed and flexibility at higher cost.

For Australians facing time-sensitive opportunities or non-standard circumstances, private lending fills a crucial gap in the financial market.

Ready to explore your options? On Introducr, you can post your funding request and receive competitive offers from verified private lenders within 48 hours.