Lenders. What are They, and How do They Work
Every American in his life at least once faced a loan. Each borrowed a large or small amount, repaid it on time, or was late in payments. As a result, we Americans know almost everything about loans.
But what are the lenders? How do they work? What are their principles?
What is a lender?
A lender is called any company that provides money through a loan. This could be a bank, credit union, or private lender. So in the broad sense of the word, our friend who lent us money is also a lender, but we are talking about commercial companies that make money on loans.
Types of lenders
There are two types of lenders in the United States: traditional and private.
Traditional lenders include banks and credit unions. Private lenders are on their own.
The key difference between private lenders and traditional ones is simplicity and speed. Private lenders are more flexible and offer more options. Traditional can often offer lower interest rates, but only to a select few while requiring a lot of time and documents from the borrower.
But there are a few other differences.
People in unusual financial circumstances are unlikely to qualify for loans from traditional lenders. This is because banks most often work with those who have an excellent credit ratings. In addition, people without a credit history cannot rely on bank loans. For the same reason - the bank needs a credit rating, and if there is no history, then there is nowhere to get a piece of credit information.
In turn, private lenders show great flexibility in this matter. They pay attention to income, assess creditworthiness in general, and do not focus on credit rating alone.
Getting a loan from traditional lenders can take weeks or even months when it comes to mortgages, for example. In addition, the borrower will have to provide a lot of papers and documents, such as work history, rent payment history, or income and tax documents for years.
At the same time, private lenders are more willing to deal with financial situations that traditional lenders find too difficult. The bottom line is that private lenders are not bound by so many government regulations and use their money to finance loans.
Interest rates from traditional lenders are often lower than those from private ones. However, the fact is that banks are regulated by stricter laws based on market rates and regulated by the federal government.
Private lenders are also regulated by law, but not as strictly. In addition, private lenders risk their own money, so they prefer to secure themselves.
To check the borrower's reliability, the bank or credit union sends a request to one of the three credit bureaus to check the borrower's credit history. Firstly, this brings us back to the first item on the list - the absence or bad credit history closes the door to the bank for the borrower. Secondly, each check is reflected in the credit report and lowers the credit rating. This check is called hard.
Because private lenders focus on the present rather than the past, they often do not resort to rigorous credit checks. Instead, they check the borrower's income and evaluate its creditworthiness using alternative methods. Such a check is called soft; it does not appear in the credit history and does not affect the credit rating.
Both traditional and private lenders have their advantages and disadvantages. Those borrowers with excellent credit ratings will not experience problems in banks except for paperwork and waiting.
People with bad credit will pay more interest to private lenders but still be able to get the money. Those who do not have a credit history will finally be able to get it by resorting to the help of the same private lenders.