Non-bank loans and their dangers

What is a non-bank loan and how does it differ from a conventional loan

A non-bank loan is a loan that is not provided by a traditional bank. Instead, it is offered by other entities such as various non-bank lenders, people-to-people platforms (such as Zonky) or private lenders. Non-bank companies do not have the same license from the CNB as traditional banks. Instead, they are only licensed to provide consumer credit. However, you may also come across providers without any licence.

Non-bank loans differ from traditional ones in many ways. The first most important difference is, of course, the type of provider. But in addition, non-bank loans also differ from bank loans in the conditions for earning the loan, the interest rate, the speed of processing and overall flexibility.

Advantages and disadvantages of non-bank loans

Like everything else, non-bank loans have advantages and disadvantages compared to traditional bank loans:

Advantages

• Availability: non-bank loans tend to be more affordable. Such loans are more affordable and can be accessed by people with problematic credit histories or those who do not meet the strict requirements of traditional banks. Non-banking companies do not have to require clients to have a statement from the debtors’ register and therefore often lend to people who have had or are having problems with debt. In addition, they also do not have to require proof of income, which means that even people with insufficient income can get them.
• Speed: Non-bank lenders often have simplified processes and can therefore approve and disburse loans much faster. The whole process can take just a few hours, whereas getting a loan approved at a bank is more of a matter of days.

Disadvantages

• Higher interest rates: non-bank companies often lend to people with unclear incomes and debt histories. Because of this, they need to protect their finances, which they do by setting much higher interest rates than you would get at a traditional bank. This means that you end up paying a lot more money than you borrowed, and you may also be more likely to be unable to repay the loan.
• Lack of regulation: non-bank lenders operate in a less regulated environment than traditional banks, which results in higher risks and lower consumer protection. You may face unclear contracts, unreasonable fees and other practices you wouldn’t encounter at a traditional bank.
• Fraud risk: There are many companies that choose to base their livelihoods on taking advantage of people in difficult financial situations. You may encounter this with non-bank loans as well. So, under the pressure of your situation, you may sign something you wouldn’t normally agree to. Whether it’s absurdly high interest rates, hidden fees or legal loopholes in contracts.

What is usury

In a way, usury is also a type of non-bank loan. In practice, it is an extremely disadvantageous loan. Usury is illegal and any contract you sign is invalid, yet you can still come across it. Whoever lends money in this way takes advantage of a person’s plight and exploits them financially by setting extremely high interest rates. In addition to high interest rates, it is also common to have gallows terms and high penalties for non-payment.

When people most often choose non-bank loans

For some people there is no other option than to take out a non-bank loan, for others it serves as a temporary relief from a difficult financial situation. So in which cases do people take out non-bank loans most often?

In case of debt

A traditional bank will not lend money to people in debt. Therefore, these people often resort to non-bank loans. They can take out a non-bank loan even without a property guarantee. It is also a common practice for indebted people to take out a foreclosure loan, which is a really unfortunate solution that often leads to a debt trap. A much more sensible solution is so-called consolidation. There are both bank and non-bank consolidation with and without mortgage, which merges all loans into one.

In case of financial hardship

A distressed situation is also related to foreclosures, which may not only be caused by debts, but also by the loss of a job or the death of a partner. People in distressed situations often choose desperate solutions and therefore also form a large group that reaches for a non-bank loan. This is because with a non-banking company, they are assured that they will be approved for a loan and at the same time get the money quickly. However, this type of people can easily fall prey to loan sharks.

In the case of unofficial income or business income

Another group of people who opt for non-bank loans are the self-employed (self-employed) and people with undeclared income. Self-employed people usually have a hard time getting a loan. Banks base their net income on a so-called flat rate. In reality, however, this is often much lower than the real income. Therefore, self-employed persons are often unable to meet the conditions set by the bank.

Similarly, people working “under the table” have no official income according to the bank, even though in reality they may earn hundreds of thousands. Therefore, a non-bank loan will come in handy for them too. Often, these people buy a house and take out a so-called non-bank mortgage, for which they guarantee the property in the same way as a conventional bank.

How to proceed in the case of a non-bank loan

A non-bank loan does not always have to be a risk. However, you need to read everything you sign and do your research before committing to anything. For this reason, there are some crucial steps to take:

I. Assess your financial situation

First and foremost, take stock of all your income and expenses and determine how much you are able to repay each month. Choose a non-bank loan only for important purposes. These definitely do not include summer holidays or Christmas presents.

II. Do your market research

Study the range of non-bank loans carefully and compare them with each other. You can either do this yourself or you can opt for the comparison offered by many comparison portals. At the same time, check out all the options , for example by looking for reviews.

III. Calculate how much you will pay

Calculate how much the interest works out to, how much you will pay in total at the end and determine which option works best for you. You can get help from a financial advisor who can best assess your financial situation, available options and future plans.

IV. Have your contract checked

Before you sign the contract, read it thoroughly and, ideally, have it reviewed by our attorney. This is the only way to make sure that you are signing what you really think you are signing and that you are not being deceived. You’ll have a solution within two business days, plus you can resolve everything online from the comfort of your own home.

V. Act fast if you have a problem

Should problems arise that, for example, prevent you from making your repayments on time, it is definitely not worth playing dead and hoping that the problem will resolve itself. In this case, you need to take action as soon as possible and agree on the next steps with the non-bank lender.

Similarly, if you suspect that the non-banking company is not acting in accordance with the contract or is acting illegally, do not wait for anything and contact our solicitors. At Dostupný advokát, we are ready to fight for your rights. We will assess your chances of success in court and propose a solution that will lead to the best possible outcome.