The Disadvantages of Non-Bank Loans

Banks emerged as lenders in the United States in the late-1800s and held their prominence through many centuries since, acccording to the Economic History Association. In recent decades, though, with the spread of mortgages, small-business loans and credit cards, many non-bank lenders have stepped in to service customers not eligible for traditional bank loans. While these non-bank lenders make more loans available, not all non-bank loans are as high-quality as bank loans.

Non-bank lenders are able to escape much of the federal and state regulation imposed on bank. After the credit market crash of 2007, the federal government passed new lending standards and regulations limiting the exposure banks could assume in making loans. These regulations did not apply to all lenders, and many non-bank lenders were able to escape oversight. This is not to say non-bank lenders are unregulated; in fact, a whole series of regulations at both the federal and state level apply to any lending activity. However, there is not regulation regarding the amount of equity a non-bank lender can release in the form of loans. There is also less oversight to assure that a non-bank lender does not have a conflict of interest in a loan contract, according to BNET.

In part because non-bank lenders do not have to meet federal and state requirements imposed on banks, non-bank lenders can set lower lending standards for borrowers. This is the reason many borrowers go to non-bank lenders in the first place. They may have lower credit requirements, and most require less paperwork in making a loan. This means the loans are easier to attain, but it also means the lender is engaging in riskier lending. This places the lender at a higher risk of bankruptcy, which could force your loan into a sale, and it also means the lender will have to compensate for losses through more expensive loan options.

Due to higher-risk lending, non-bank lenders are more likely to lose money on loans. They make up for these losses with higher interest rates for even qualified borrowers. They may also issue loans with higher penalties if you miss payments, pay late or even choose to prepay the debt. On the whole, non-bank loans are simply more expensive than most bank loans, says CreditLoan.com.