A lender is an institution, group, or individual that loans money to borrowers for various reasons. They expect to be repaid on a specific schedule, usually with interest.
Lenders can make a lot of things possible, but you have to be sure you're working with a reliable person or institution and that you can handle the loan. Just because somebody is willing to lend you money doesn’t mean it’s a good idea to borrow—make sure you have a solid plan in place for repaying before you accept a loan.
What Is a Lender?
Lenders enable individuals and businesses to accomplish things they wouldn't be able to do without a loan. It could be a bank lending money for a 30-year mortgage or a person letting a small business borrow startup money on a short-term repayment plan. Whatever the specific need, a lender can grant the money to make it happen.
They don't do this out of generosity, however; lenders expect to get repaid. For this reason, borrowers must meet certain criteria in terms of cash on hand, credit score, and collateral. They are looking for assurances that you'll be able to repay the loan.
Once you're approved by a lender, the terms of your loan agreement will describe exactly how the process works: how often you’ll make payments, how long you have to repay, how much interest you’ll pay, what happens if you fail to repay, and more. It’s helpful to evaluate all of those items so you’ll know what you’re getting into and how much each loan costs.
When you're evaluating a loan offer, it's important to look beyond the monthly payment and evaluate the total cost of the loan and how it will impact you financially.
How Finding a Lender Works
It’s almost always a good idea to shop around. Your best deal might not be with the first lender you talk to, and you can’t necessarily count on the biggest advertisers (or brand names) to deliver the best deals. The only way to know you’re getting a good deal is to talk with several lenders and compare your options.
The type of loan you need will determine how many choices you have on lenders. Some organizations don’t do student loans, for example. For other loans, such as personal loans, you’ll have plenty of options. You'll have to fill out a few loan applications to find the best deal. If possible, ask somebody with professional experience about the type of loan in question (if you need a home loan, ask a trusted real estate agent, for example).
Types of Lenders
There are many options when it comes to finding the right lender.
Banks and Credit Unions
If the financial institution you work with doesn’t lend money, it’s a safe bet that it can suggest a reputable lender who does what you need. Banks and credit unions are a good choice for:
- Personal loans
- Auto loans
- Credit cards
- Home equity loans and lines of credit
- Small business loans
- Some mortgages
Loans From Friends, Family, and Peer-to-Peer Loans
You might find that you have better luck getting approved or you may pay less if you borrow from alternative sources. Sometimes, family and friends can make good lenders, but this can be risky. Peer-to-peer loans can help you skip the bank without putting relationships in jeopardy. It is safe to borrow from online lenders only if you should use well-known, reputable sites to avoid problems. There are predatory lenders out there looking to take advantage of unsuspecting borrowers.
Money can sour otherwise good relationships, so think carefully before borrowing from loved ones.
For some loans, you’ll need a lender that specializes in a particular type of loan.
Student Loan Lenders
If you need to borrow for school, visit your financial aid office. They’ll explain your options and help you start the process. It’s usually best to start with loans from the U.S. government, which come with certain benefits in terms of more lenient repayment and lower rates, but you can borrow from private lenders if necessary.
Mortgage Lenders (Purchase and Refinancing)
If you’re borrowing to buy a home, refinance, or get home equity, you’ve got several choices. A mortgage broker, while not a lender, may have relationships with numerous lenders and can help you shop (but it’s still a good idea to compare any mortgage broker to at least one alternative). Your bank or credit union may also have resources—whether they lend directly or employ mortgage brokers and loan officers.
If you're buying land, building, or renovating, construction loans come from specialized lenders as well as banks and credit unions.
The sources above should take care of most of the loans you’ll ever need. However, certain situations might lead you to other types of lenders. In general, your costs and risks increase as you stray off the beaten path—so you should only do so when it’s necessary.
For example, hard money lenders offer short-term financing for real estate investors (but most homeowners are better off with traditional lenders). Payday loans and title loans provide small amounts of short-term cash at a high price. Furniture, appliance, and department stores also offer to finance, but you can often find better terms elsewhere.
Every lender will have its own set of criteria to evaluate in order to determine whether you qualify for a loan and what terms it will offer if you do. It will generally come down to factors such as your credit score, the amount of money you're seeking, how much you are already borrowing, the length of the loan, and any assets you have to offer as collateral.
- Lenders are individuals, groups, or institutions that let others borrow money for a set period of time and repay it with interest.
- They come in various forms, from banks and credit unions to friends and family, and specialized institutions.
- When you are in the market for a loan, always compare several options to find the best deal.