What are private loans?

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on July 11, 2022 Fact Checked
What are private loans?

Ever needed an alternative source of funding to a home loan or personal loan? This is where private loans could come in handy.

Private lenders fill a gap in the market and generally offer: bridging loans, caveat loans, bad credit loans and second mortgages. Peer to peer lenders can also be considered private lending. Private loans can be used for a lot of things from debt consolidation, funding a home purchase, personal expenses, medical bills, buying a vehicle and so on.

According to 2018 research from PwC, 27% of all loans in Australia came from private lenders. Despite there being more than 100 mainstream lenders (banks, non-bank lenders, credit unions and so on) to choose from in Australia, some people still struggle to get finance. This is where private lenders could come in handy. Like mainstream lenders, these brands offer funding anywhere from about $20,000 to more than $5 million. But before diving in, there’s a few things borrowers need to know first.


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Buying a home or looking to refinance? The table below features home loans with some of the lowest interest rates on the market for owner occupiers.

Lender

Variable
More details
  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws

Variable Home Loan (LVR < 70%)

  • Min 30% deposit
  • No monthly or ongoing fees, add 0.10% for offset
  • Unlimited redraws
Variable
More details
REFINANCE ONLY
  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
REFINANCE ONLY

Variable Rate Home Loan – Refinance Only

  • A low-rate variable home loan from a 100% online lender. Backed by the Commonwealth Bank.
Variable
More details
AN EASY DIGITAL APPLICATION
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
AN EASY DIGITAL APPLICATION

Neat Variable Home Loan (Principal and Interest) (LVR < 60%)

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
Variable
More details
NO ONGOING FEES
  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster
NO ONGOING FEES

Yard PAYG Home Loan (Principal and Interest) LVR ≤ 80%

  • No ongoing fees - None!
  • Unlimited additional repayments
  • Easy online application, find out if you're approved quick!
  • Redraw- Access your additional payments if you need them
  • Use the app to get loan insights to help you pay off your home loan faster

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. All products will list the LVR with the product and rate which are clearly published on the Product Provider’s web site. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of August 11, 2022. View disclaimer.

How private fund loans work

Private fund loans are offered by alternative lenders and generally fill gaps in the market that aren’t covered by mainstream lenders, such as major banks and credit unions. Such niches include:

Bridging loans

No these aren’t to build a bridge. Bridging loans provide for the shortfall if you purchase a new home before you’ve sold your old one. Terms are typically short - anywhere from three to six months is common. Interest rates are also typically higher than regular home loans - 5-6% p.a. or more is common. Repayments are also usually interest-only.

Caveat loans

Caveat loans provide short-term funding, with the caveat they are backed by a property. Like bridging loans, they are typically used to fund the gap between selling the old home and purchasing a new one. Terms are short, usually right on the money of when the National Consumer Credit Protection Act of 2009 kicks in at 62 days. The loan is payable in full when your old property settles. Interest rates are also usually higher than what you’d expect on a regular home loan.

Bad credit loans

You’ve probably seen these doing the rounds already. Bad or no credit loans provide funding for people with a few recent blemishes on their credit history. This includes unpaid previous loans, potential court orders, unpaid traffic offences, unpaid utility bills, and other red flags. To mainstream lenders, this is typically the profile of a borrower they do not wish to provide funding. This is where private lenders step in, but expect a much higher interest rate. They can provide the borrower with the ability to repay their debt, rebuild a good credit history and find their feet.

Second mortgages

To paraphrase XZibit from Pimp My Ride: Ayo dawg, we heard you like mortgages, so we put a mortgage on your mortgage so you can home while you home.

As the name implies, second mortgages are when you borrow money a second time around with the same property acting as security. This can provide additional funding if you need more cash, especially when regular refinancing is difficult.

The main negatives are you’ll probably get a higher interest rate because the perceived risk for the lender is greater. In addition, you’re essentially indebted twice for the one property. This poses problems if you’re running behind or defaulting on your payments. The first lender will collect what’s theirs, potentially leaving you in the lurch with the second lender.

Pros and cons of private fund loans

Like most things in life, you need to take the good with the bad. There are a few things to weigh up with private loan lenders before you jump in.

Pros

  1. Another option for funding: Another avenue for funding could be a good thing, and these lenders typically cover gaps in the market mainstream lenders do not.

  2. Can help in a bind: Quick funding can help you in a bind, such as if you find your new home purchase settles quicker than your old home’s purchase.

  3. Unlock cash in your property: Caveat loans and second mortgages can be means of accessing equity in your property. This offers opportunities to invest in other things or fund other purchases.

  4. Quick settlements: These lenders tend to act quickly, with money in your bank account delivered within days.

Cons

  1. Higher interest rates: The enhanced risk of these alternate funding options means you’ll probably face a higher interest rate.

  2. Fewer options: There are probably fewer lenders to choose from, which theoretically lowers competition and drives up cost i.e. interest rates.

  3. Short loan terms: These loans are typically required to be paid back anywhere from 62 to 90 days, maybe six months in some circumstances.

  4. Things could go wrong: These financing sources are often taken out when there are other loans in place. This heightens a lot of risk if you fall behind on payments. For example, if you default on your first mortgage, the home goes to them first, meaning you’re holding the bag with the second mortgage. With bridging finance, if your old home doesn’t settle within about 90 days, you could also run into some problems.


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In the market for a personal loan? The table below features unsecured personal loans with some of the lowest interest rates on the market.

Lender

FixedUnsecuredN/AMore details
CHECK YOUR RATE IN 2 MINUTES
  • No ongoing fees
  • No early exit charges
  • Apply online
CHECK YOUR RATE IN 2 MINUTES

Unsecured Loan (Excellent Credit)

  • No ongoing fees
  • No early exit charges
  • Apply online
FixedUnsecuredN/AMore details
APPLY ONLINE
  • No ongoing fees
  • No early exit charges
  • Apply online
APPLY ONLINE

Low Rate Personal Loan Unsecured (Excellent Credit)

  • No ongoing fees
  • No early exit charges
  • Apply online
FixedUnsecuredN/AMore details
FUNDING WITHIN 24 HOURS
  • 2-min rate estimate
  • Flexible repayments
  • No monthly, ongoing or early repayment fees
FUNDING WITHIN 24 HOURS

Liberty Personal Loan (Excellent Credit History)

  • 2-min rate estimate
  • Flexible repayments
  • No monthly, ongoing or early repayment fees

*Comparison rates based on a loan of $30,000 for a five-year loan term. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate, Rates correct as of August 11, 2022. View disclaimer.


Photo by Khamkeo Vilaysing on Unsplash



Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered. Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site. Savings.com.au, yourmortgage.com.au, yourinvestmentpropertymag.com.au, and Performance Drive are part of the Savings Media group. In the interests of full disclosure, the Savings Media Group are associated with the Firstmac Group. To read about how Savings Media Group manages potential conflicts of interest, along with how we get paid, please visit the web site links at the bottom of this page.

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Harrison is Savings.com.au's Assistant Editor. Prior to joining Savings in January 2020, he worked for some of Australia's largest comparison sites and media organisations. With a keen interest in the economy, housing policy, and personal finance, Harrison strives to deliver and edit news and guides that are engaging, thought-provoking, and simple to read.

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