It’s money, not loyalty: Demystifying loan sources
What kinds of loan sources exist for personal and home loans in Australia? Most people think immediately of their own bank, and then of other banks.
The truth is, there is a huge number of loan sources, many of which are hidden from the public. Unless you know about them, it’s unlikely that you will see them. Then when you do, you might have a lot of questions about whether they are legitimate.
Banks aren’t the only source of funding
Banks have a kind of ‘dominant power’ in the lending market here in Australia. They are dominant, visible, and therefore control much of what you, as a member of the public, see about financial lending.
In fact, there are many ‘layers’ of funding sources. The ‘big four’ banks, and then a range of smaller banks, form part of that first layer.
The Big Four are the Commonwealth Bank, the National Australia Bank, Westpac, and ANZ. These institutions have invested a lot of money in branches and staff, and they have a lot of overheads. They also have shareholders who need to see that the banks are making money and doing good business.
So it makes sense that they would only lend money to those they consider ‘safe’ according to their own risk policies.
Banks see loans as risk management, not interest
As a consumer, it’s easy to start thinking that loans are all about the interest. That’s because we focus a lot on interest rates, to make sure you don’t pay too much.
But for the lenders, loans are all about risk and risk management. This is why they are very specific about the people whom they will lend to. It’s called a ‘borrower profile’. When a bank says to a mortgage broker like us, ‘we just want this type of client’, then it mitigates at least half of their risk.
So what you see is that the banks have cornered the market. Then if you go to a bank and don’t fit their ideal profile, you could be forgiven for thinking that you don’t have any other option.
Second tier loan sources are big companies
In the ‘second layer’ of loan sources we still have very big companies like banks, but they are not necessarily financial institutions. Instead, they’re companies like insurers. They have a lot of money they can use, so they make it available as loans - and they then compete with the banks.
This loan source often comes more cheaply than one of the big banks. You’ll notice that many of them target different niches in the market. Some lend to self-employed people, for example, and that’s the profile that they look for.
A good example of a second-tier lender is AMP: An insurance and superannuation company that also has a credit license and a lending policy.
Third tier loan sources manage funds from all of the major banks
This is where things start getting interesting! The third ‘layer’ of loan sources is Australia’s loan managers.
What is a loan manager?
A loan manager is a company that has been created to manage funds from the major banks. Here’s how it works.
Let’s think about a company like Home Loans Ltd. They will go to a major bank, say, NAB, and asks if it has any spare money. When the bank says ‘yes’, the loan manager asks for it more cheaply - because it’s not being used anyway - and gives the bank a better return. They are trading the same funds, but the loan manager can do it in a more flexible way, because they don’t have the same borrower profile to fit as the bank itself.
Loan managers do a great job in the Australian loans market. They often have cheap, reliable products, and they find different ways of helping different people.
Fourth tier loan sources are non-bank lenders
Non-bank lenders are companies that we love here at Optimo Home Loans, because they will lend to people that nobody else will consider.
A great example is one of our lenders, Pepper Money. In Pepper Money’s case, they have a specialised lending service, which allows them to loan money to clients whose income types a bank would consider ‘weird’ or ‘unusual’.
But in this day and age, the ‘weird’ income type is becoming a lot more common! They include people on perpetual contracts, like teachers and freelancers, and even people who are relying on income protection because of workplace injuries.
Non-bank lenders may also consider people who have credit histories that are not squeaky clean.
Can I trust a non-bank lender?
Absolutely, you can. Non-bank lenders and other types of lenders still have to comply with Australia’s strict compliance requirements. Usually there are extremely big companies behind these lenders, with a lot of assets and money internationally.
In an economic catastrophe, things might be different. But in that situation, nobody is safe: Not even your bank.
Will my bank give me a good deal because I’ve been a loyal customer?
The nice answer to this question is, ‘they might’, but a better question is: Is your bank going to keep giving you a good deal over the life of the loan?
The truth is that very few loan sources - especially the banks! - have the time to check in on their customers. Provided they continue to make payments against their loans, and not cause trouble, they won’t come to the bank’s attention.
But imagine if you not only got a great loan to start with, but kept getting great deals just because you’re a customer. That’s what we do at Optimo Home Loans. We make sure that you get a deal that’s perfect for you, and we check-in every year or two to make sure that, over the life of your loan, it stays that way.
Talk to us about your needs
To find out which one is the best loan source for you, send us an email. We will help you obtain the best loan possible, and will work with you to keep it that way. Contact us now