Who is a lender? Everything you should know

who-is-a-lender

You can’t underestimate the essential roles lenders play in the financial market. On the individual level, lenders give loans to borrowers who have divers financial needs. These loans could be as; guarantor, travel, debt consolidation, emergency, quick loan, Payday loans etc. Lenders are surely good options of financial help for individuals and businesses. This is because individuals and businesses do not always have enough cash flow to carry out their financial obligations. The meaning of a lender, lending process, and so on are all-inclusive in this article.

Who is a Lender?

A lender is an individual, public or private group, or even a financial institution that gives funds to a person or business. And they expect the person or business to repay the loan. This repayment will include the payment of any interest or fees that follows the loan. And it can come in increments, as in a monthly mortgage payment or as a lump sum.

Individuals can use the money they got from lenders for various purposes, such as financing working capital, student loan, or business capital. Because of uncertainties, businesses can also borrow credit to provide a backup line of credit. Especially where they generate irregular cash flows.

What is the lending process like?

Borrowers may seek funds for a variety of reasons, such as a home mortgage, car loan, or an SME loan. Lenders always state how borrowers must repay the loans in the terms of the loans. Besides that, the terms also bear the period, and the consequences of missing payments and default. However, for loans that are past due, a lender may go to a collection agency to recover any funds.

Either the lender or borrower can start lending. Most commonly, a borrower meets the lender or a bank for a loan. And as a borrower they could require you to fill a loan application form. Then the information they need in the application will include the loan amount you need, and its use. Besides that, you’ll state the current cash flows or income, your physical address, names and address of your guarantors.

However, a bank or financial institution may also meet individuals or corporations with a proposal to lend them credit at certain terms. Here, the potential borrowers are most times high net worth individuals. And also high-growth businesses that may need credit regularly for investment or funding their working capital.

How do lenders make loan decisions?

Lenders are always very careful with loan decisions. This is because if they make thoughtless decisions, they’d risk offering loans to borrowers who may not repay their loans. So in order to avoid such risks, lenders decide in the following ways:

1. Individual borrowers

Borrowers credit history can largely determine their qualification for a loan. The lenders usually examine the borrowers’ credit report, which provides the names of other lenders extending credit. It also shows what types of credit are extended, the borrowers’ repayment history, and more.

Lenders get this report from credit bureaus, and it helps them determine whether the borrower can manage payments. Especially based on their current employment and income. Also, lenders may also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report. And this will show borrowers’ creditworthiness and help make a lending decision.

Borrowers pledge collateral when applying for a secured loan, such as an auto loan or a home equity line of credit (HELOC). They will evaluate the collateral’s value. And also they will subtract the existing debt secured by the collateral from its value. Then the remaining equity will affect the lending decision.

After that, the lender will evaluate borrowers’ available capital, which normally includes savings, investments, and other assets (collateral). This is essential should there be job loss or other financial challenges. Besides that lenders may ask what the borrowers plan to do with the loan. To know if they’ll use it to purchase vehicles or other properties. However, they could also consider other factors, such as environmental or economic conditions.

2. Business borrowers

Financial institutions and credit unions may offer loans to businesses with their guidelines. Whereas private institutions, venture capitalists and angel investors lend money based on their own criteria.

In order to make effective loan decisions, they’ll know the purpose of the business, the owner’s character. Besides that, they’ll also know where the business operates, the annual sales and the business growth.

Small business owners provide both their personal and business balance sheets to prove their ability to repay loans. The balance sheets bear the details of the individual’s assets, liabilities and net worth of the business. However, the lender will have a final say on the terms should business owners propose a repayment plan.

How can I find a lender?

It’s always the best decision to research different lenders on the market. This is because each lender has different loan terms and interest. And you can only know the one that best suits you through research. So, research different lenders on the market when you’re planning to borrow a loan.

Therefore, carry out your research based on the loan type you need. This is because most lenders focus on lending definite types of loans. Or you can ask for recommendations from your family, friends, advisors, mentors, and colleagues. Typically, those who borrowed money in the past. So, pick two different lenders at the very least, and compare them to determine the more favorable option for you.

Banks and credit unions are the best place to start with when borrowing a loan. When you want to get business, personal, and auto loans, such financial institutions are a wonderful choice.

3 factors to consider when finding a lender?

There are some factors you must consider when looking for a lender. They are:

1. The loan amount

The loan amount you need will determine the type of lender you should approach. Family, friends and peer-to-peer lenders can be viable options for small loans because they have little to no borrowing requirements. But for large business loans, you can approach a bank to see their terms and interest they offer.

2. Startup business

Most commercial banks shy away from lending to startup companies because of the absence of stable cash flows and transaction history with the bank. The best places to get a startup business loan are the less traditional types of lenders, such as family and friends, crowdfunding, and online lenders.

3. Pledged assets

Most lenders would require borrowers to provide collateral against the loan they offer to them. So, if borrowers have business assets with verifiable proofs of ownership. Then they can get loans from financial institutions easily and at better terms. These assets as collateral the borrowers offer provide a level of assurance to the lender. So that, in case of default, the bank can sell the asset to recover the total of the loan.

What are types of lenders?

You already know that the most common lenders are banks, credit unions and other regular traditional financial institutions. However, there are still other types of lenders. They include:

  1. Peer-to-peer (P2P) lenders
  2. Family and friends
  3. Crowdfunding contributors
  4. Yourself

1. Peer-to-peer (P2P) lenders

Some peer-to-peer lending operates through online organizations. And their online sites help to connect lenders with borrowers. Most times P2P interest rates are lower than borrowers would find with a traditional bank. But it could be higher than what a lender could get from a certificate of deposit.

2. Family and friends

Loans transactions from family and friends who can become lenders are sometimes called “private party loans.” You should consider the impact a loan might have on your personal relationship with these people. Especially if you can not repay the loan at the end of the day. However, it’s better to prepare a loan agreement to help ensure everyone agrees.

3. Crowdfunding contributors

Some crowdfunding sites are like P2P lending sites but there are a few differences. This is because they digitally connect the people in need of money with the people who have and want to lend money. This is unlike P2P lending. Because the people who contribute to crowdfunding efforts may not receive their money back cedis-for-cedis. Instead, they may receive a bonus from the person or project they’re funding.

4. Yourself

As an alternative to investing, if you have the means, you can loan your own money to your business. Therefore, if you choose to loan yourself money, then write a contract that specifically states your role as a lender. The payment schedule, and the consequences should there be a default on payments.

Conclusion

Borrowers must ensure they repay their loans to lenders. As this will encourage lenders to continue offering their services to other borrowers. Besides that, lenders should always check the credit history of borrowers before giving them loans. This is because the knowledge of the credit history of borrowers will help them know who can repay their loans. Therefore, in order to do that accurately, they should get borrowers’ credit history from notable credit bureaus in Ghana.

Categories: Personal finance
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