What Is a Lender?
A lender is an individual, a group (public or private), or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid. Repayment will include the payment of any interest or fees. Repayment may occurin increments (as ina monthly mortgage payment) or as alump sum. One of the largest loans consumers take out from lenders is amortgage.
Key Takeaways
- A lender is an individual, a public or private group, or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid.
- Repayment includes the payment of any interest or fees.
- Repayment may occurin increments (as ina monthly mortgage payment) or as alump sum.
Understanding Lenders
Lenders provide funds for a variety of reasons, such as a home mortgage, an automobile loan, or a small business loan. The terms of the loan specify how it must be satisfied (e.g., the repayment period) and the consequences ofmissing payments and default.A lender may go to a collection agency to recover any funds that are past due.
How Do Lenders Make Loan Decisions?
Individual borrowers
Qualifying for a loan depends largely on the borrower’s credit history. The lender examines the borrower’s credit report, which details the names of other lenders extending credit (current and previous), the types of credit extended, the borrower’s repayment history, and more. The report helps the lender determine whether—based on current employment and income—the borrower would be comfortable managing an additional loan payment. As part of their decision about creditworthiness, lenders may also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report.
The lender may also evaluate the borrower’s debt-to-income(DTI) ratio—which compares current and new debtto before-tax income—to determine theborrower’s ability to pay.
When applying for a secured loan, such as an auto loan or a home equity line of credit (HELOC), the borrower pledges collateral. The lender will make an evaluation of the collateral’s full value and subtract any existing debt secured by that collateral from its value. The remaining value of the collateral will be the equity thataffects the lending decision (i.e., the amount of money that the lender could recoup if the asset were liquidated).
The lender also evaluates a borrower’s available capital, which includes savings, investments, and other assets that could be used to repay the loan if income is ever cut due to a job loss or other financial challenge.The lender may ask what the borrower plans to do with the loan, such as use it topurchase a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.
Business borrowers
Different lenders have different rules and procedures for business borrowers.
Banks, savings and loans, and credit unions that offer Small Business Administration (SBA) loans must adhere to the guidelines of that program.
Private institutions, angel investors, and venture capitalists lend money based on their own criteria. These lenders will also look at the purpose of the business, the character of the business owner, the location of business operations, and the projected annual sales and growth for the business.
Small-business owners prove their ability for loan repayment by providing lenders both personal and business balance sheets. The balance sheets detailassets, liabilities, and the net worth of the business and the individual. Although business owners may propose a repayment plan, the lender has the final say on the terms.
Where Can I Get a Small Business Loan?
One good lender option for small business borrowers is the Small Business Administration (SBA), a U.S. government agency that promotes the economy by assisting small businesses with loans and advocacy. The SBA has a website and at least one office in every state.
What Are the Different Types of Mortgage Lenders?
The three most common options for borrowers seeking a mortgage lender are mortgage brokers, direct lenders (e.g., banks and credit unions), and secondary market lenders (e.g., Fannie Mae and Freddie Mac).
How Can I Get a Mortgage with Bad Credit?
Getting a mortgage when you have bad credit is possible, but a larger down payment, mortgage insurance, and a higher interest rate will likely be required.
The Bottom Line
When you need to borrow money for a personal purchase or jumpstart your business, there are many options. When choosing a lender, look at their reputation and longevity—banks and other financial institutions are the traditional choices, but angel investors and online micro-lenders are gaining popularity. Before borrowing, make sure you understand the full breadth of your loan agreement and can afford to repay it.
FAQs
The lender must evaluate the customer's ability to monitor and manage expenses and evaluate operational efficiencies (cost/unit, etc.). The lender will also evaluate the customer's past handling of debt obligations and ability to structure debt so he or she can invest in capital items.
What is loan definition and types? ›
A loan is a sum of money that an individual or company borrows from a lender. It can be classified into three main categories, namely, unsecured and secured, conventional, and open-end and closed-end loans.
What is the definition of a lender? ›
A lender is an individual, a public or private group, or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid. Repayment includes the payment of any interest or fees.
What are the three main types of lenders? ›
Direct lenders originate their own loans, either with their own funds or borrowing them elsewhere. Portfolio lenders fund borrowers' loans with their own money. Wholesale lenders (banks or other financial institutions) don't work directly with consumers, but originate, fund, and sometimes service loans.
Who makes lending decisions? ›
The bank still makes the decision to lend you money but the Government pays some of the cost if you cannot repay.
What four factors do lenders generally use in their loan making decisions? ›
What Are the Four Cs of Credit?
- Capacity.
- Capital.
- Collateral.
- Character.
Loan application, risk evaluation, credit decisioning, origination, underwriting, servicing, collection, reporting – all of that sounds complex only for as long as you haven't taken an advanced lending automation system for a test-drive.
What is the basic definition of a loan? ›
Key Terms. Loan. A loan is when money is given to one party in exchange for repayment of the loan principal, plus interest. A loan may or may not be secured by collateral and loan options and interest rates depend on the prospective borrower's income, credit score, and debt levels.
What is one type of loan? ›
Personal loans and credit cards come with high interest rates but do not require collateral. Home-equity loans have low interest rates, but the borrower's home serves as collateral. Cash advances typically have very high interest rates plus transaction fees.
What is a lender example? ›
Lenders fall in the category of creditors. Banks, credit unions, and peer-to-peer (P2P) lending are common examples.
A lender is a financial institution that lends money to a corporate or an individual borrower with the expectation that the money will be repaid at a later date. Lenders require borrowers to pay interest on the amount borrowed, usually charged at a specific percentage of the total amount of loan.
What is the definition of lender or creditor? ›
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed.
What are four types of lending institutions? ›
The main categories are banks, credit unions, GSEs, issuers of ABS, other financial companies, and nonfinancial companies. We separate banks and credit unions because their business lines and strategies differ in some ways.
What are the 3 C's of lending? ›
Character, capital (or collateral), and capacity make up the three C's of credit. Credit history, sufficient finances for repayment, and collateral are all factors in establishing credit. A person's character is based on their ability to pay their bills on time, which includes their past payments.
Are there different types of loans? ›
An unsecured loan requires no collateral. They usually have higher interest rates than secured loans because they are riskier for lenders. An installment loan or term loan is repaid with fixed payments over a set period. Revolving credit lets you borrow up to a predetermined credit limit.
How does a lender decide who they lend money to? ›
In addition to the credit report, lenders may also use a credit score that is a numeric value – usually between 300 and 850 – based on the information contained in your credit report. The credit score serves as a risk indicator for the lender based on your credit history.
How long does it take for a lender to make a decision? ›
Some lenders may take 1 - 2- days, others may take as long as a few months to give their final approval. The delay could be due to the borrower's financial situation, or just the business of the market and the lender.
How long does a lender have to make a decision? ›
1. Timing of notice - when an application is complete. Once a creditor has obtained all the information it normally considers in making a credit decision, the application is complete and the creditor has 30 days in which to notify the applicant of the credit decision.
