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 occur in increments (as in a monthly mortgage payment) or as a lump sum. Mortgages are among the largest types of loans consumers take out from lenders.
Key Takeaways:
- A lender provides funds to individuals or businesses expecting repayment.
- Repayment includes interest and fees.
- Payments can be made in increments or as a lump sum.
Understanding Lenders
Lenders provide funds for various reasons, including home mortgages, automobile loans, or small business loans. The loan terms detail repayment requirements and consequences of missed payments and defaults. A lender may involve a collection agency to recover overdue funds.
How Do Lenders Make Loan Decisions?
Individual Borrowers
Qualifying for a loan largely depends on the borrower’s credit history. The lender examines the borrower’s credit report, detailing previous and current loans, repayment history, and other information. This report helps lenders decide if the borrower can manage a new loan based on their current employment and income.
Lenders may also check the FICO score in the borrower’s credit report. Additionally, they consider the debt-to-income (DTI) ratio — comparing current and new debt to gross income — to determine repayment ability.
For secured loans like auto loans or home equity lines of credit (HELOC), borrowers pledge collateral. Lenders assess the collateral’s value and existing debts to determine total equity. This leftover equity influences the lending decision.
Lenders also evaluate available capital, including savings, investments, and other assets, to see if these could be used for repayment during financial challenges. They might ask the purpose of the loan. External factors like economic conditions can also play a part in the decision.
Business Borrowers
Business lending criteria can vary by lender. Banks, savings and loans, and credit unions offering SBA loans must follow specific program guidelines.
Private institutions, angel investors, and venture capitalists lend based on their own criteria. These organizations consider the business purpose, owner’s character, location, projected sales, and growth. Business owners present personal and business balance sheets detailing assets, liabilities, and net worth. The lender decides final loan terms, despite any proposed repayment plans.
Where Can I Get a Small Business Loan?
For small business borrowers, one good option is the SBA, an agency supporting small businesses with loans and advocacy. The SBA has offices in every state and provides resources online.
Different Types of Mortgage Lenders
Borrowers seeking mortgages typically consider mortgage brokers, direct lenders like banks and credit unions, and secondary market lenders like Fannie Mae and Freddie Mac.
Getting a Mortgage with Bad Credit
While obtaining a mortgage with bad credit is possible, it often requires a larger down payment, mortgage insurance, and a higher interest rate.
The Bottom Line
When needing to borrow money for personal purchases or business ventures, many options are available. Evaluate lenders’ reputations and stability; traditional financial institutions remain popular, but new options like angel investors and online micro-lenders are growing. Always understand your loan agreement in depth and ensure you can afford repayment.
Related Terms: Credit History, Debt-to-Income Ratio, Collateral, Capital, Small Business Administration.
References
- The Free Dictionary Financial Dictionary. “Lender”.
- Experian.com. “Average Consumer Debt Levels Increase in 2022”.
- Wells Fargo. “How to Get a Loan: Learn What Lenders Look For”.
- Bank of America. “How Debt-To-Income Ratio (DTI) Affects Mortgages”.
- U.S. Small Business Administration. “Loans: Eligibility requirements”.
