For borrowers Private Loan Rates and Costs, Explained

Why private loans cost more than bank loans

Private loan pricing reflects speed, flexibility and risk, and the capital behind it.

Risk. Private lenders fund deals that sit outside bank policy: a short trading history, a credit issue, a property type or location a bank avoids, a second mortgage. More risk needs a higher return to justify it.

Capital. Banks lend largely from deposits, some of the lowest-cost money in the financial system. Private lenders lend investors' capital, and those investors expect a return well above what a deposit earns. The loan has to earn that return.

Time and work. A private lender may assess, value and settle a deal in days, and each loan is assessed on its own rather than run through a standard process. That work is built into the price.

Price is what the risk costs, not what the lender feels like charging. Two loans that look alike to a borrower can price quite differently because the lender sees different risks in them.

The parts of the price

Interest. Usually quoted as an annual rate and often charged monthly. Many private loans are interest only, with the principal repaid at the end.

Prepaid or capitalised interest. Many short-term loans, including most bridging and caveat loans, don't need monthly repayments. With prepaid interest, the lender deducts interest for some or all of the term at settlement, so the borrower receives less than the loan amount. With capitalised interest, it's added to the balance as it accrues and repaid at the end, which means interest is charged on interest. Both ease cash flow. Both mean the net funds are less than the gross loan.

Establishment fee. Charged by the lender for setting up the loan, usually calculated on the loan amount and often deducted from the advance.

Line fees. On facilities such as construction loans or revolving lines, a fee may be charged on the full limit, whether or not it's drawn.

Valuation and legal costs. The lender instructs an independent valuer and its own solicitors, and the borrower usually pays for both, as well as their own lawyer. Some of these costs arise before settlement and can still be payable if the loan doesn't proceed.

Broker or packaging fees. Where a broker or packager structures and presents the deal, a reputable one discloses its fee and agrees it with the borrower up front, before any work starts.

Exit and other fees. Some loans carry a discharge fee, a minimum interest period or an early repayment cost. Most private loan contracts also include default interest: a higher rate that applies if the loan isn't repaid on time or its terms are breached. It's one of the terms borrowers most often overlook.

The lowest rate isn't always the lowest-cost loan

With that many parts, comparing loans on rate alone can mislead. What matters is the total cost over the term the loan will actually run.

A loan with a lower rate and higher fees can cost more over a short term than one with a higher rate and lower fees, because fees are paid once and weigh more heavily the shorter the loan. A loan with a minimum interest period costs the same whether it's repaid early or not. And a loan structured tightly around one date can become expensive if the exit runs a few months late and extension fees or default interest apply.

There's a regulatory reason this falls to the borrower. Consumer loans in Australia generally have to be advertised with a comparison rate that folds certain fees into one figure. Business loans don't carry the same requirement, because the National Credit Code is built around credit for personal, domestic or household purposes. For a business borrower, the comparison rate is the one they work out themselves. In practice that means getting every cost in writing, working out the net funds after fees and prepaid interest, and looking at the total over a realistic term rather than the best case.

The cost of not settling

The other side of the ledger is the cost of the alternative. The most expensive loan is often the one that doesn't settle. A lost deposit, penalty interest under a contract, a purchase that falls over, a creditor that won't wait: each can cost far more than the difference between two rates.

That's why borrowers in a time-critical position often weigh certainty and timing alongside price. It's also why private finance is usually short term. The higher cost is carried for a defined period, with a clear exit strategy to repay it, often a refinance to lower-cost funds once the reason for the private loan has passed. Whether the cost is justified depends on the deal, and an accountant is the right person to test the numbers.

Where Private Lending Group fits

We work with more than 70 private and non-bank lenders and stay across what they're funding, and how they're pricing it, right now. If your scenario fits, we can connect you with the lenders it suits, so the full cost can be seen and compared before anything is signed.

Getting indicative terms costs you nothing, and any fees are agreed with you up front, before any work starts. The lender assesses the deal and makes the credit decision. Where a bank is the better fit, it goes through our trusted broker network.

We work on commercial and business-purpose loans only. If you need a home loan, personal loan or any other consumer loan, we'll put you in touch with one of our trusted brokers.