Principal Differences between Banks and Private Lenders

Created: 2016-12-05 07:00:00

There is a distinct way you should approach banks and deal with them. That is different from how you should work with private lenders. The difference lies in the varying ways banks and private lenders work. You must understand the principal differences between banks and private lenders so you can realise why they work in the ways they do, what their products and services are designed the way they are and what you can expect from them in various scenarios.

Banks are regulated by the central bank and by extension the lawmakers. There are financial institutions that fall under the banking sector. The private lenders are the nonbanking sector. They are an integral part of the financial industry but they are not regulated as banks. Privately held banks or publicly traded banks and not the same as private lenders. When we talk about private lenders, they are nonbanking companies lending money in the open market. They are not institutionalised.

Banks operate under the stringent banking norms. They cannot deal in unsecured loans, they cannot charge interest lower than what the central bank has decided and there is a maximum cap on what they can charge. You will not be offered a home loan that comes at a 20% rate of interest. But you will find private lenders offering you short term loans or smart loans in UK at a higher rate. These would be unsecured while home loan is secured but the difference in rates of interest is principally because of regulation and the lack of it in respective scenarios.

Banks are expected to have public policies and while they do have discretions in almost everything they do, they are also answerable. Private lenders are not answerable to anyone. They can run their business the way they do. As long as they don’t mislead or rip off people, they can attend to their business interests.

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