Banks vs Private Lender Loans: The Pros and Cons


Banks and private lenders are just two major options when thinking of getting a personal loan. But is one really better than the other? How do you know which one is the better solution for your needs? This dilemma requires deeper consideration.

The fact is neither is better than the other. These are both viable options, and you need to pick one that best suits your particular needs. The best option is one that meets your needs, and you can get approval for, based on their requirements.

What is the deal with banks? What is it with banks that top corporations prefer acquiring business loans from them? The simple answer is that banks offer much lower interest rates. This is due to the fact that banks generally have a lower cost of funds compared to private lenders. Banks can always borrow cash from the checking and savings accounts of retail customers. The interest rates for these accounts are quite small that the funds they contain are inexpensive for the bank to utilize.

The funds of private lenders come from investors who expect decent returns or come from other banks who lend them funds at significantly higher rates than it typically costs them to earn money. Despite very low interests, banks can become opportunistic by setting the bar quite near to those offered by a private moneylender. For instance, if a bank observes that a competing private lender offers a rate of 10%, and that bank’s rate is normally 6%. The bank may adjust its rate such that it becomes significantly high, but not higher than 10%. The new rate may be just near that value but not exceeding it (9-9.5%). This gives the illusion of lower rates, but not necessarily a cheap one as it accumulates over time. Banks can do this and still beat the competition.

However, the risk for not getting approved for a personal loan is greater for banks. Bank loans usually come with strict policies based on several requirements that the client must satisfy. These serve as protection for other depositors and regulate the amount of cash released. Banks may also incur miscellaneous fees, reporting requirements, and covenants that are not included in the basic rate, which can add to the overall cost of the money they lend.

Private lenders, on the other hand, don’t have as many restrictions or other ways to generate revenue (aside from fees they impose when extending a loan). The fact is private lenders are there with only one specific function, and that is to generate income from loans they give out. Thus, higher rates come with the relative ease of getting approved for a loan. Banks have lower rates but have several things to consider before approving a loan. This is a kind of a double-edged sword.

Picking a source for your loan is generally up to you. If you think you’re just starting out and feel that you may not pass the requirements of banks, then private lenders will be the better option. If you feel you can save more through banks, and are confident you will pass their requirements, then banks are a more economic choice. The most important thing is that you understand the terms handed out by either source.

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