A non-bank financial institution (NBFI) is an institution that offers loans and financial products but does not have a full banking license.
These types of institutions are privately owned which gives them more leverage and flexibility with the rates and fees they can offer customers. This allows them to offer low-cost loans and generate competition in the banking world, forcing the banks to lower their rates to compete.
Many people consider using an NBFI when looking to secure a small business, personal or business loan. Some types of non-bank financial institutions include:
Risk-pooling institutions like insurance companies work with economic risks such as death, damage and risks of loss to make a return. The two main types of insurance companies are general insurance and life insurance. General insurance is more of a short term contract while life insurance is long term and is active until the insurer’s death.
Specialised sectoral financiers like payday lending companies and real estate financiers provide short term loans and limited financial services to a targeted demographic. Payday lenders can help with unsecured business loans and are a quick fix for borrowers. Those struggling to get credit or with limited recourse to funds are more likely to use a payday lender when securing a loan.
Financial Service Providers
Financial service providers are made up of management consultants, security and mortgage brokers and financial advisors. They operate on a fee-for-service basis and offer advice to investors and brokers. They improve informational efficiency for investors and offer a transactions service for investors to liquidate their assets.
Institutional investors are organisations that trade securities in volumes that qualify for lower commissions. This kind of non-bank financial institution can be found working with pension funds and mutual funds.
Non-bank lenders are regulated and although they don’t hold a banking license, they are still held to the same fair lending policies as banks. Compare your home loan offer from non-bank institutions with bank lenders. One of the main reasons for using non-bank financial institutions is eligibility. Non-bank lenders are more likely to give you a bigger line of credit than a bank, who would take into account your earnings and expenditure. Be completely sure when you take out a loan from a non-bank institution that you have the means to pay back the loan and interest. It’s also important to check out the interest rates and comparison rates to avoid any nasty surprises later down the track, and make sure the fees are suitable for you.