For getting a loan, most people know the old way: Creating mountainous financial documentation, completing lengthy applications, and waiting for approval from a bank or credit union. But there is another option some borrowers may not know about – Private Lending.
What is a No Doc Private Loan?
As its name implies, a No Doc private loan (also called a no-doc Loan) is a Loan that requires little paperwork from the borrower. Unlike conventional Loans which require tax returns, pay stubs, bank statements, and other financial paperwork, No Doc loans are based more on the value of the property and the borrowers credit profile.
No Doc Loans first popped up in Australia in the late 1990s to assist self-employed people and small business owners in obtaining finance. Many of these borrowers had income and assets that traditional means could not document adequately and did not qualify for standard loans.
No Doc Loans come with easier qualifications and a simplified application, but they come with trade-offs. Since there is more risk with less documentation, No Doc loans typically carry higher interest rates than fully-documented Loans. The loan sizes might also be smaller. Since NCCP changes No Doc Loans can only be used for Business Purposes which exclude residential property.
Even with these drawbacks, Low Doc Loans are an option for some borrowers who might have trouble getting approved elsewhere. That includes:
- Self-employed/contract workers: Individuals who are self-employed, freelancers, or contractors typically have variable income that is harder to prove than with typical bank documentation. Tax returns do not always reflect their earning. Low Doc Loans might be an option, using other methods to assess their ability to repay.
- Small business owners: People with small businesses or startups might invest much of the revenue back into the company, making their income appear lower on paper. They may also have complex finances that are harder to document. Low Doc Loans can fund growth to capitalize on opportunities or manage cash flow.
- Investors: Real estate investors and those who earn income from investments and assets may prefer the low-doc route since their earnings aren’t directly paid out in a paycheck. The LOw Doc Loan application can concentrate more on expected revenue from the investment itself.
- Those in unusual circumstances: Those with recently changed jobs, just started a business, or other life circumstances that affect their documentable income may find no-doc and low-doc financing attractive when they need financing.
Of course, not everyone Needs Low Doc Loans. Those with easily verifiable income (salaried employees with regular paychecks) will likely get better rates and terms with a fully documented loan. Borrowers also should prepare for higher costs with low-doc lending.
Finding Private Lenders
If private lending does sound like the right move, borrowers will need to go to private lenders that specialize in the space – most big banks don’t. Look to a private lender. Private lenders are typically more flexible and have different qualifying requirements than traditional lenders, including private money lending institutions and individuals.
For results of possible lenders, borrowers can type in “private lender,” “private lender Australia,” “private loan lenders,” or “private money lending.” Mortgage brokers may also be a good way to find lenders with low-doc programs.
Compare interest rates, fees, loan limits, and qualifying standards when evaluating lenders. The exact documentation needed for a No Doc Loan varies. Some lenders will request bank statements, a list of assets, or an accountant’s letter rather than tax returns and pay stubs to prove income.
The actual application process is typically faster and simpler than a traditional loan. Approval times are sometimes rapid, within 24-48 hours. However, assembling any required documentation and underwriting still could take days to weeks.
Key Considerations for Private Lenders
Borrowers considering Private Lenders should also know these five things:
- Loan purpose: No-doc loans are often for business or investment properties instead of primary residences. Lenders may place limits on acceptable loan purposes.
- Credit standards: No Doc Loans require less income documentation but lenders typically have credit score thresholds. Good to excellent credit typically qualifies borrowers.
- Rates: Expect higher interest rates on a No Doc loan than on a traditional fully-documented Loan. Rates can go many percentage points higher based on the lender and the borrower’s credit rating.
- Fees: Some No Doc Loans charge additional fees such as application and origination fees. These should be included in the overall borrowing cost.
- Loan-to-value (LTV) ratios: On No Doc Loans, Lenders typically set lower LTV ratios on them to hedge their risk. That means borrowers might need a larger down payment or more equity in a property.
Terms of repayment:
No Doc Loans typically carry shorter repayment terms than traditional 30-year mortgages. Lenders may offer adjustable-rate terms or require balloon payments.
Responsible borrowing:
Whatever kind of loan borrowers select, they need to understand the terms and only borrow whatever they can afford to repay. All costs (principal, interest, taxes, and insurance) must be calculated:
Conclusion
All in all, Private Loans provide a route to financing for Australians who don’t fit the traditional lending profile. They have some downsides in cost and open up loans to the self-employed, small business owners, investors, and other borrowers with income that is harder to document with traditional means.
Anyone considering a No Doc loan should shop around with several private lenders, compare terms, and make sure the Loan helps instead of hurts them financially. By researching options and understanding requirements and risks, borrowers can decide if a No Doc Loan is right for them.
