A lender is a person, group, or financial institution from which borrowers receive money. Creditors establish different terms regarding loan repayment periods and set various interests on loans as payment for the service. Redemption may occur in installments, usually month-to-month, or as a one-time amount.

Lenders provide non-targeted (without reference to concrete purposes) and targeted credits (mortgages, auto, and student loans). Some lenders require collateral as a guarantee of payment. There are several types of lenders.

Traditional Lenders

This category includes large retail banks and credit unions. Such lenders feature the following advantages:

  • A high credit limit. Many financial organizations are ready to approve substantial amounts ranging from $100,000 to $1 million.
  • Lower interest rates. Loyal commissions are possible due to stable funding sources (deposits from clientele, central bank facilities, bond issuance, and capital stock).
  • Longer loan terms. While alternative lenders frequently require borrowers to return the money within several weeks or months, banks and credit unions offer long-term credits (up to 25-30 years).

The drawbacks of traditional financial institutions:

  • Rigorous requirements for borrowers. A good credit score and an extensive credit history are a must. Collateral is usually required for large loans, like mortgages.
  • Longer review of applications compared to alternative lenders. Time-consuming paperwork and lengthy approval can take several weeks to months.

Alternative Lenders

This type comprises peer-to-peer platforms, microfinance companies, and online lenders. They provide short-term borrowings and impose more lenient terms than traditional institutions. Meanwhile, these loans feature higher interest rates. Typically, alternative lenders offer small credit limits and don’t require customers to prepare a long list of documents.

Peer-to-peer platforms and applications allow borrowers to choose from hundreds of investors. Money can be received on the date of application.

Online lenders are financial institutions that work on the web only. They provide personal and business loans and, sometimes, refinancing services.

Microfinance organizations give credits to individuals on a budget and low-income businesses.

How do Lenders Assess Applicants?

Creditors impose specific requirements on borrowers. These demands depend on the type of debtor:

  • Physical entities. Traditional lenders consider the borrower’s credit score and report, as well as the debt-to-income ratio, to evaluate the solvency. Secured credits involve the assessment of the collateral’s value. Payday loans usually imply more loyal requirements since modest amounts are loaned. In such cases, borrowers must provide lenders with income proof and personal information.
  • Business owners. Banks and other major financial organizations stick to the principles established by the United States Small Business Administration (SBA). Individual lenders and private groups rely on their criteria. Typically, they consider the company’s purpose, the location of its operations, the projected annual income, and the business’s prospects. Owners are obliged to provide personal and business balance sheets.

Choosing a lender is up to an individual’s goals. Traditional institutions are more appropriate for those who need long-term credit. Banks and credit unions are preferable options for buying property/vehicles or starting a business. Alternative lenders assist borrowers in solving everyday issues. Microfinance, online, and peer-to-peer services suit people encountering unforeseen circumstances.