Getting the funds to start a business is often difficult absent things like stellar credit, a high-paying job, or multiple guarantors. Due to this, there are a lot of people who would rather spend time saving up and accumulating their capital over borrowing it elsewhere. Sometimes, however, this approach is not feasible as the person or business has to acquire the funds immediately. When that happens, there are generally two options that one can take — public banks or private lenders. So, what are some of the main similarities and, more importantly, differences between these two alternatives?
The Main Similarity
Obviously, both of these providers are going to give someone their capital in exchange for charging interest. Additionally, however, an important similarity is that both of the alternatives tend to use other people’s money. For instance, banks rely on their customers’ funds to make loans and earn interest rates for themselves. Private lenders, on the other hand, use investors’ money and aim for high-interest rates that will pay both them and those investors. In each case, the interest rate is considered revenue that one makes because they are giving away capital and foregoing the current market rates for other types of investing.
Getting Approved
According to the founder of American Loans, JL Llavina, the number of differences is much higher for banks and private lending. The reason why is that they go about the process in a different manner and rely on various factors to determine people’s eligibility. So, getting approved might be a little easier with private lenders. For instance, a person that goes to a large bank will have to showcase their employment history, current income levels, and credit score. Although private lenders use all of those inputs as well, they are more lenient in the area of bad credit and moderate earnings. So, if someone has no credit history at all and only worked one job thus far, private lending is probably a much better option for them.
The Interest Rates
Given that banks and private lenders seek different reasons to lend someone their money, they are obviously going to charge them a different amount for it as well. For instance, banks tend to stick with algorithms that tell them what an appropriate interest rate is given the variables at play. Private lenders, on the other hand, seldom have a ceiling amount of interest that can be charged. So, the expense to get a loan from a private lender can be much higher as their interest rates are almost always noticeably greater than those of mainstream banks.
Accessibility in the Marketplace
As far as the accessibility of loans in the market, there is generally no shortage of providers who offer the service. Most of the popular financial institutions and conglomerates have enormous departments that handle these transactions. So, borrowing money from large banks might be a little more common in society. Regardless, there are a plethora of private lenders giving out smaller loans as well. In each case, after the person decides on which of these two options they will take, finding a few viable providers should not be too difficult.
Regulations
As JL Llavina points out, the starkest differences between banks and private lenders are the regulations. Banks often carry the label of being “too big to fail” which was a contributing factor to the crash of the housing market and the economic recession that went with it. As a result, the federal government instituted sweeping reform with the hopes of cracking down on what it viewed as predatory lending by the banks. At the same time, the government also paid massive amounts of taxpayer money back into the bank system to keep these economic engines running. The end result was a banking system that is being watched very closely, but also artificially inflated by bailout money.
Private lenders on the other hand have had no such bailouts and are not under such intense scrutiny. Their motivation is entirely centered on driving a profit and paying back investors. This gives them much more freedom over their operations, but often at the cost of increased expenses for lenders to account for the higher risk.
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