Should You Borrowing From Banks or Non-Bank Lenders?

When considering home loans or other financial products in Australia, borrowers have two main options: banks and non-bank lenders. Each comes with its own advantages and disadvantages, depending on your financial situation and needs.

Here’s a comparison between the two:

1. Regulation and Security

• Banks:
• • Regulated by APRA (Australian Prudential Regulation Authority): Banks are required to comply with strict regulations and capital requirements, offering an extra layer of security.
  • Government Guarantee: Deposits up to $250,000 in Australian banks are guaranteed by the government under the Financial Claims Scheme, providing additional security for your savings.
• Non-Bank Lenders:
• • Not regulated by APRA: Non-bank lenders are regulated by ASIC (Australian Securities and Investments Commission) but are not subject to the same capital requirements as banks. They follow the National Consumer Credit Protection Act, ensuring fair practices but without the APRA oversight.
  • No Government Guarantee: Non-bank lenders do not offer the same government protection for deposits, as they do not accept deposits.

2. Interest Rates

• Banks:
• • Competitive Rates: Major banks often offer competitive interest rates, especially to attract high-quality borrowers. Banks typically have the flexibility to offer discounts on rates for larger loans or loyal customers.
  • Rate Changes: Banks often adjust their rates based on broader economic conditions, such as changes in the Reserve Bank of Australia (RBA) cash rate.
• Non-Bank Lenders:
• • Potential for Lower Rates: Non-bank lenders can offer more competitive rates because they typically have lower overheads and a more flexible structure. They often cater to borrowers who may not fit the strict lending criteria of banks, making them appealing for people seeking a good deal.
  • Less Tied to RBA Rates: Non-bank lenders may offer more flexibility in their pricing, as they aren’t as reliant on the RBA’s decisions and can pass savings to customers in the form of lower rates.

3. Loan Flexibility and Eligibility

• Banks:
• • Stricter Lending Criteria: Banks are known for their stringent lending criteria, especially for borrowers with lower credit scores, self-employed individuals, or those with irregular income.
  • More Loan Features: Banks typically offer a wider range of loan products and features, such as offset accounts, redraw facilities, and the ability to split between fixed and variable rates.
• Non-Bank Lenders:
• • More Flexibility in Approval: Non-bank lenders often cater to borrowers who might not meet the strict criteria of banks. This includes those with lower credit scores, unusual employment histories, or those who need more flexible repayment options.
  • Limited Features: While non-bank lenders may offer competitive rates, they may have fewer loan features like offset accounts or package deals that combine loans with other products.

4. Customer Service

• Banks:
• • Established Infrastructure: Major banks usually have a wide network of branches, ATMs, and customer service channels. They also offer more in-person support options.
  • Large-Scale Operations: Because banks serve a large customer base, their customer service may sometimes feel impersonal or less tailored to individual needs.
• Non-Bank Lenders:
• • Personalised Service: Non-bank lenders often pride themselves on providing more personalised and responsive customer service, since they typically deal with fewer clients.
  • Online and Direct Channels: Many non-bank lenders operate without branches and provide their services through online platforms or phone-based support, which can be more convenient for tech-savvy borrowers.

5. Fees and Charges

• Banks:
• • Potentially Higher Fees: Banks may charge more fees for products like account management, loan setup, or early repayment penalties, especially for more feature-rich loans.
  • Package Deals: Banks often bundle home loans with other products like credit cards or insurance, which may reduce fees, but this can lead to hidden costs if not carefully reviewed.
• Non-Bank Lenders:
• • Lower Fees: Non-bank lenders usually have fewer or lower fees compared to banks because they have lower overhead costs. They may offer more straightforward products without the extra frills, which keeps costs down.
  • Transparency: Non-bank lenders often market themselves as having transparent, no-frills offerings, but it’s still important to check the fine print.

6. Loan Types and Accessibility

• Banks:
• • Wider Range of Loan Products: Banks generally offer a variety of loans, including home loans, personal loans, business loans, and investment loans. They also offer special products for first-home buyers, investors, and other categories.
  • Investment Loans and Wealth Management: Banks often have more complex financial products and wealth management services for investors.
• Non-Bank Lenders:
• • Niche Products: Non-bank lenders may specialise in certain types of loans, such as low-documentation loans for self-employed individuals, or loans for borrowers with a history of defaults or financial hardship.
  • Specialised Borrowers: Non-bank lenders often cater to borrowers who fall outside the mainstream, such as those seeking a low-doc loan or people who are rebuilding their credit.

7. Reputation and Trust

• Banks:
• • Well-Known Brands: The big banks (e.g., Commonwealth Bank, Westpac, ANZ, NAB) are household names and have established reputations for trustworthiness, backed by government regulation and deposit protection.
  • Scandals and Customer Complaints: While banks have the size and security, they have also faced scandals and customer service complaints in the past, especially related to fees and aggressive lending practices (e.g., the 2018 Royal Commission into Misconduct in the Banking Sector).
• Non-Bank Lenders:
• • Less Brand Recognition: While many non-bank lenders offer excellent products, they may not have the same brand recognition or trust associated with traditional banks.
  • Smaller and Newer: As non-bank lenders are often smaller and newer, customers may feel less secure choosing them, especially for large loans.

Summary of Key Differences: