In very simple terms, a lender is a financial institution that makes funds available to consumers.
The term lender is not exclusive to the loans industry, there are also mortgage and credit card lenders.
What do lenders do?
The lender provides finance to consumers on the premise that it will be paid back in repayments. Most loans and mortgages are repaid monthly, weekly or in-full on an agreed date.
The lender makes their money by applying interest to the finance. This means that when a consumer borrows money, they will have to pay back that amount plus some extra.
How interest rates vary
Mortgages will typically carry the lowest interest rates, closely followed by low-rate personal loans from banks, supermarkets and high-street lenders.
The interest rates on credit cards are slightly higher, however these can be avoided is you repay the outstanding balance in full every month.
Interest rates will also vary depending on the consumer that the product is targeting. Typically, products aimed at those with a good credit history will carry lower rates. Whereas products like bad credit loans will have higher interest rates.
This is what’s known as risk-based pricing; pricing the product based on the risk of the consumer failing to pay. Those with a lower credit score will be seen as a higher-risk as they have a history of mismanaging past credit commitments.
The difference between lenders and brokers
Often in the finance industry, lenders and brokers are two terms that are regularly misconstrued.
A broker is not a lender. Instead, brokers work with lenders to find customers a suitable credit product.
A broker will generate leads which they will then send to a suitable lender that they work alongside. Usually, a broker will work with 10+ lenders all offering a variety of products. This gives them the best chance of being able to find the customer a product that fits their needs.
Equally, lenders will have relationships with multiple brokers. They will use the leads that brokers pass to them to supplement the leads that they are generating directly.
The relationship is mutually beneficial as it means lenders can generate revenue without having to invest as heavily in marketing. Whilst brokers can generate commission on leads that successfully pay out.
You may notice some companies advertising themselves as direct lenders. This is simply another way of explaining that they are not a broker and that they lender their money directly to the consumer.« Back to Glossary Index