Banks, non-bank lenders and private lenders

Why the type of lender matters

Borrowers often hear that a deal "will need to go non-bank" or "is one for a private lender" without anyone explaining what separates those groups. The difference is not a matter of quality. It comes down to where each lender's money comes from and which regulators look over its shoulder. Those two things influence the policies a lender applies, the documents it asks for, how quickly it can act and how it behaves if your loan needs to change.

This lesson explains the three broad groups in neutral terms. It does not rank them, and the bank vs non-bank question has no general answer: what matters is how a particular offer fits your circumstances.

Group one: deposit-taking institutions

Banks, credit unions, building societies and mutual banks share one legal feature. Each is an authorised deposit-taking institution, usually shortened to ADI. APRA, the Australian Prudential Regulation Authority, grants that authority under the Banking Act 1959, and only an ADI may carry on a banking business that accepts deposits from the public.

How ADIs are funded

Customer deposits are the core of an ADI's funding, supplemented by money raised in wholesale and bond markets and by shareholders' or members' capital. Deposits held with an ADI are covered by the Financial Claims Scheme up to a government-set limit if the institution fails. That scheme protects savers, not borrowers.

How ADIs are regulated

Because they hold the public's savings, ADIs must meet APRA's prudential standards on capital, liquidity, risk management and lending practices. APRA's guidance also influences how ADIs test whether a borrower can afford repayments. ASIC oversees their conduct, and an ADI that offers regulated consumer credit holds an Australian Credit Licence and belongs to AFCA. Many banks and customer-owned institutions also subscribe to an industry code of practice that adds commitments on top of the law.

Group two: non-bank lenders

A non-bank lender makes loans but is not an ADI, so it cannot take deposits. Some non-banks are large organisations offering home, investment and commercial loans that look much like bank products. Others specialise in areas such as self-employed borrowers, low-doc and non-conforming loans or commercial property.

How non-banks are funded

Most non-banks rely on wholesale money. A common pattern is a warehouse facility, where a bank or institutional investor lends the non-bank a line of credit secured by the loans it writes. Once enough loans build up, the non-bank may package them into a securitisation, selling bonds backed by the pool to investors and using the proceeds to repay the warehouse. Some also use corporate debt, equity or investor funds. Warehouse and securitisation arrangements carry eligibility criteria, which is one reason a non-bank's policy can be firm on some points even though it sits outside prudential banking rules.

How non-banks are regulated

APRA does not supervise non-banks in the way it supervises ADIs. Larger non-banks report lending data to APRA, and APRA has powers to make rules about non-bank lending if it considers that necessary for financial stability. A non-bank offering regulated consumer credit needs an Australian Credit Licence, must meet responsible lending obligations and must be an AFCA member, exactly as an ADI would.

Group three: private lenders

A private lender can be an individual, a family office, a company lending its own capital or a fund that pools investors' money. Private lenders usually assess each loan individually, with heavy reliance on the security property and the exit, and their loans are mostly short term. The lesson on how private lending works follows a private loan from enquiry to repayment.

How private lenders are funded

Funding ranges from one person's savings to a managed fund with many investors. The guide private credit explained looks at how fund-backed lending differs from lenders using their own capital and why that can matter when a loan needs more time.

How private lenders are regulated

The rules turn mainly on what the loan is for. If a private lender offers regulated consumer credit, it needs a credit licence and AFCA membership like any other lender. Much private lending is to companies or for business purposes and generally falls outside the National Consumer Credit Protection Act 2009. Even then, general laws against misleading, deceptive and unconscionable conduct apply, and unfair contract terms rules may extend to some small business contracts. A fund that raises money from investors is regulated as a financial product, but those rules protect the investors rather than the borrowers. Check any detail that matters to you with a lawyer.

Rules that apply across all three

Whatever the lender type, some obligations are shared:

• Identity and source-of-funds checks. Lenders are generally covered by anti-money laundering law and must verify who you are. The lesson on AML and KYC checks explains what to expect.
• Privacy. Lenders handling credit information must follow privacy law, which the OAIC administers.
• Complaints. AFCA can hear complaints against its members. The lesson on financial hardship and complaints covers the process.

A side-by-side summary

How the differences show up during a loan

The distinctions above are not only theoretical. They tend to surface at a few predictable moments:

• At application. An ADI's credit policy is shaped by prudential expectations, so exceptions can be harder to obtain. A non-bank works within its funders' criteria. A private lender may set conditions deal by deal, which allows flexibility but also means documents vary more.
• When circumstances change. A request to vary, extend or release security goes to whoever holds the loan, and that holder's own funding terms can influence the answer.
• If repayments become difficult. Hardship rights under consumer credit law depend on whether the loan is regulated, not on the lender's category. For an unregulated loan, the contract and any voluntary policies largely set the path.

A worked description in words

Imagine a hypothetical self-employed tradesperson refinancing a home loan while also seeking funds to buy equipment. An ADI asks for tax returns and tests repayments against its serviceability rules. A non-bank lender accepts business activity statements instead, within criteria its warehouse funder has set. A private lender offers a short loan secured by the home, focused on its value and a plan to refinance later, and asks the borrower to confirm the business purpose of the equipment portion. Each conversation follows different rules, and the borrower's job is to understand those rules rather than to assume one route is automatically safer.

Common mistakes

• Assuming "non-bank" means "unregulated". Licensing, conduct and privacy laws still apply.
• Believing deposit protection somehow covers a loan. It protects savers only.
• Thinking a lender's licence makes every loan it offers regulated. A licensee can also make business loans outside the consumer credit regime.
• Confusing a broker with a lender. A broker arranges the loan; the lender funds it and sets the terms.
• Asking about the rate but not about funding, extensions or who manages the loan if it is sold.

What to ask any lender

1. Are you an authorised deposit-taking institution, a non-bank lender or a private lender?
2. Where does the money for this loan come from?
3. Do you hold an Australian Credit Licence, and are you an AFCA member?
4. Will this loan be treated as regulated consumer credit?
5. Do you follow an industry code of practice?
6. Could the loan be sold or transferred, and who would then manage it?

You can search a lender's credit licence on ASIC's professional registers, and Moneysmart explains consumer credit rights in plain language.