What is a lender?
A lender is an individual, public or private group, or financial institution that makes funds available to others in the hope that the funds will be repaid. The reimbursement will include the payment of any interest or costs. The repayment can be made in installments (as for the monthly mortgage payment) or in the form of a lump sum.
Lenders can provide funds for a variety of reasons, such as a mortgage, car loan, or small business loan. The loan conditions specify how the loan is to be satisfied, the duration of the loan and the consequences of the default. Home mortgage loans are one of the biggest loans that consumers take out.
Eligibility for a loan largely depends on the borrower’s credit history. The lender examines the borrower’s credit report, which details the names of other lenders granting credit, the types of credit granted, the borrower’s repayment history and more. The report helps the lender determine if the borrower is comfortable managing payments based on current employment and income.
The lender can also assess the borrower’s debt-to-income ratio (DTI) by comparing current debt and new debt to pre-tax income to determine the borrower’s ability to pay.
Lenders can also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report to determine credit worthiness and help make a loan decision.
When applying for a secured loan, such as a car loan or a home equity line of credit, the borrower gives as collateral. An assessment will be made of the value of the collateral, and the existing debt secured by the collateral is subtracted from its value. The remaining equity affects the loan decision.
The lender assesses the available capital of a borrower. The capital includes savings, investments and other assets that could be used to repay the loan if the household income is insufficient. This is useful in case of job loss or other financial difficulty. The lender can ask what the borrower plans to do with the loan, such as using it to buy a vehicle or other property. Other factors can also be taken into account, such as environmental or economic conditions.
Examples of lenders
Banks, credit unions and credit unions may offer Small Business Administration (SBA) programs and must comply with SBA loan guidelines. Private institutions, angel investors and venture capitalists lend money according to their own criteria. These lenders will also examine the nature of the business, the character of the business owner and the expected annual sales and growth of the business.
Small business owners prove their ability to repay loans by providing lenders with personal and business balance sheets. The balance sheets detail the assets, liabilities and net worth of the business and the individual. Although business owners can offer a repayment plan, the lender has the final say on the terms. He can go to a collection agency.
Key points to remember
- A lender is an individual, public or private group, or financial institution that makes funds available to others in the hope that the funds will be repaid.
- The reimbursement will include the payment of any interest or costs.
- The repayment can be made in installments (as for the monthly mortgage payment) or in the form of a lump sum.