In short
A bank lends money it takes as deposits from the public. A private lender lends its own capital. Because depositors' savings are at stake, banks are prudentially supervised, must hold capital against losses, and their depositors have insurance protection within limits. Private lending has none of that: no supervision of that kind, no compensation scheme, and no safety net if a borrower fails. In exchange private lenders are faster, will look at assets and situations that do not fit a bank's template, and are considerably more expensive. A private lender also cannot become a bank by growing — taking public deposits to lend on is a reserved activity.
A bank and a private lender both give people money and charge for it. Almost everything else about them is different — what they are allowed to do, who protects the money, how quickly they move, and what happens when things go wrong.
The difference that matters most is the one nobody mentions: a bank lends other people's deposits, and a private lender lends its own capital. Everything else follows from that.
01 — The root differenceWhere the money comes from
A bank takes deposits from the public and lends them out. Because those deposits belong to ordinary people, the state regulates banks heavily and stands behind them in specific ways.
A private lender lends money it already owns. Nobody's savings are at risk except the lender's own, so the state has far less reason to intervene — and correspondingly offers far less protection.
02 — Side by sideThe differences that actually affect you
| Bank | Private lender | |
|---|---|---|
| Source of money | Deposits from the public, plus wholesale funding | Its own capital, or capital lawfully raised under a regulated structure |
| Regulator | Prudential Authority at the Reserve Bank, plus the conduct regulators | The National Credit Regulator, where the Act applies at all |
| Deposit protection | Depositors covered by the deposit insurance scheme, within limits | None. There is nothing standing behind a private lender |
| Speed | Weeks to months. Credit committees and standard processes | Days to weeks. Often one decision-maker |
| What it will look at | Standardised criteria. If you fall outside them, the answer is no | The specific asset and situation. Willing to look at what does not fit a template |
| Cost | Lower. Cheap funding and scale | Higher. Expensive capital and no scale to spread costs |
| Tenure | Long. Twenty-year bonds are ordinary | Short. Months to a few years is typical |
03 — If you are borrowingWhich one should you go to?
The honest answer is the bank, if the bank will have you.
Bank money is cheaper, the terms are longer, and the process is standardised in ways that protect you as much as them. A borrower who can get bank finance and instead pays private-lending rates has usually not tried the bank.
Private lending earns its place where a bank cannot help, and the usual reasons are:
- Speed. The opportunity closes before a bank can decide.
- The asset is unusual. It does not fit a standard lending product.
- The situation is temporary. Bridging between two events, where the exit is clear but the timing is not.
- The borrower is unusual. A newly formed entity, a body corporate, a business between funding rounds.
If none of those apply and you are still being offered private lending, ask why. The most common answer is that the borrower never approached a bank, and the second most common is that a bank said no for a reason worth understanding.
04 — If you are the lenderYou are not a small bank
This is where the comparison is most often misused. A private lender is not a bank in miniature, and the differences run against you.
| A bank has | A private lender has |
|---|---|
| Thousands of loans, so one default is noise | A handful of loans, so one default is most of the year |
| Cheap funding from deposits | Its own capital, which has an opportunity cost |
| Legal and recovery departments | An attorney it instructs and pays by the hour |
| Capital requirements it must hold against losses | Whatever it happened to keep back |
| Credit data at scale | What the borrower chose to disclose |
The consequence
A bank can price a loan on averages because it has enough loans for averages to work. A private lender cannot. With ten loans out, a single failure is not a statistic — it is the entire year.
So spreading the money matters more to a private lender than anything else. And security, documents and checking the borrower are not paperwork around the business. They are the business.
05 — RegulationWhat each one is bound by
Banks fall under the Banks Act. The Prudential Authority watches them. They must hold capital against losses, report regularly, and follow rules written to protect the people whose deposits they hold.
Private lenders may need to register under the National Credit Act, depending on who they lend to. Where the Act applies it caps what they may charge, requires affordability checks and prescribes how they enforce. Where it does not apply — much lending to businesses — very little of that regime reaches them.
06 — The boundaryWhat this page does not decide
Whether a particular loan is better taken from a bank or a private lender depends on the deal, the timing, the security and what the money is for. This page sets out how the two differ; it does not price your transaction.
Nothing here is a recommendation about a specific lender or product, and the absence of a safety net behind private lending is a fact to plan around rather than a reason to avoid it.