So, you’re in a situation where you need a loan or some form of credit. However, it’s your first time, so you have one question on your mind: What is a lender?
Let us help you learn about lenders and how they can help you. Then, you can make an informed decision to help yourself!
What is a Lender?
Generally, a lender is an individual or institution that loans out money. In most cases, it’s a credit union, a bank, or a corporate entity. But recently, individuals and investors have joined in. Lenders come in to help you if you need to:
- Pay tuition fees
- Buy a home
- Purchase a car
- Fulfill personal obligations
Regardless of what the loan is for, the lender expects repayment plus interest. Interest is the cost paid for borrowing money, and it varies from one lender to another and from one borrower to the next. With mortgage loans, the lender and the interest applicable can affect the borrowing cost by thousands of pounds.
Types of Loans that Lenders Offer
There are two general loan types: secured and unsecured loans.
These loans have assets attached to them. If you cannot repay, the lender can repossess the attached asset and sell it to recoup the loan balance.
The amount you can borrow against an asset or property depends on the LTV (loan to value ratio), often expressed as a percentage.
With a secure loan you can:
- Get longer terms
- Borrow large sums
- Get away with a poor credit score
Types of secured loans include:
- Logbook – loans secured against your car.
- Homeowner – these loans secured against your home. They often last between 3 and 35 years.
- Vehicle finance – loans secured against the car you purchase with the loan. Once you repay the loan, the lender transfers ownership to you.
- Debt consolidation – loans secured against property or other assets intended to pay off other debts.
With these loans, no security in the form of an asset or home is required. You borrow any amount and repay it in installments for a specified period.
The cost of an unsecured loan depends on how risky a lender thinks you are. In comparison to secured loans, they are quicker and easier to apply. However, you need a good credit score to get good rates. Often, they are more expensive.
To learn more about secured vs. unsecured loans, read our article Is A Secured Or Unsecured Loan Best For You?
How Long Do Lenders Give You to Repay the Loan?
This depends on the type of loan, the lender, and the borrower. But generally, some loan types have shorter repayment periods, and others have longer repayment periods.
Approving or Rejecting an Application
Different creditors use different criteria to determine whether you are a good risk or not. For many, it boils down to:
- Credit score
- Credit history
- The loan amount
- How much debt you have
- The loan length
- Available assets for collateral
Credit scores are used to determine your risk level. During a loan application, you’ll fill out a form that details a lot of your financial information. Each fact carries specific points which are added to give the credit score. The higher your score, the higher your chances of approval are.
Most lenders have a credit score threshold of 700. Below this level, they may decide not to lend you. Alternatively, they’ll lend you money at a higher interest.
Note: during loan applications, lenders like banks will review your credit history. However, some no credit check lenders will offer loans without looking into it.
The information available on the credit report include:
- The Electoral Roll
- Public Records
- Account information
- Home repossessions
- Previous searches
- Financial associations
- Linked addresses
Choosing the Best Lender
Since your loan interest depends on the lender, choose them wisely. Below are some factors to consider.
Credibility and experience
You need to work with an authorized lender and who will not trick you into paying hidden and unexpected costs. If you’ve never heard of the lender in the past, look them up online. Read reviews of past customers and search for their experience in the type of loan you need. Experience is gauged by the length of time they’ve operated.
The interest rate will determine the cost of your loan – the lower the number, the cheaper the loan. Unfortunately, you cannot take the interest rate plastered on their site at face value. These rates are averages, and the actual interest is calculated depending on your credit history and loan amount.
Also, remember interest rates aren’t the only expense.
Flexibility of payment
Will the lender be willing to put back a payment for a month if you have too much on your plate or will they slap you with a large fee for late payment?
Also, consider factors like exit fees when getting a long-term loan. If you suddenly have a lot of money to pay off the loan at once, you’ll need to know you can do it without incurring penalties.
Always do your due diligence to find a good lender and request your credit report once a year to confirm its accuracy. If you need a loan, check out some products here.