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What Is A Lender? Meaning, Different Types And How To Choose The Right One

Victoria Araj5-minute read
UPDATED: February 29, 2024


Most everyone could use a bit of extra money at times to help achieve their goals. Whether you’re buying real estate, taking a vacation, getting a degree or paying off medical bills, the assistance of a loan can be a valuable lifeline. But what is a lender, and what does it really mean to work with one?

Let’s examine what borrowers can expect from common types of lenders and how to determine which loan type is best for you.

Lender Definition

A lender is an individual or institution that provides the opportunity to borrow a substantial amount of money. A prospective borrower typically must fulfill certain requirements for the lender to be willing to take the risk of loaning them funds. Repayment terms are established at the beginning of the relationship for the timeline and the rate at which the borrower must pay the loan back.

What Does A Lender Do?

Simply put, a lender funds loans to borrowers at a cost, typically expressed as interest on each payment. In general, lenders assess the level of risk involved with loaning money to an interested borrower, and their reason for borrowing. The lender then approves those who they believe can uphold their end of the bargain by paying the loan back in full and on time. Lending decisions are made based on a number of factors, including:

In some cases, lenders ensure their investment by requiring a borrower to put up collateral in case the borrower ends up being unable to continue making payments on the loan. These are called secured loans, and you’ll most often find them in use when you’re looking to buy a house or a car.

An unsecured loan, on the other hand, doesn’t require using collateral for approval. You’ll find unsecured loans more often if you’re looking to apply for a personal loan or student loans.

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Types Of Lenders

There are various moneylenders you might  p;.work with, depending on your reason for applying for a loan and your needs as a borrower. Let’s go through a few of the most common types of lenders and the loans they offer.

Traditional Banks And Credit Unions

Banks and credit unions provide traditional lending services to individuals and businesses looking to borrow funds, the main difference being that banks are for-profit institutions and credit unions are nonprofit. Through these types of lenders, you can apply for a variety of loans, including home loans, personal loans and auto loans.

Private Lenders

If you’re looking to borrow money in a more informal capacity, you can look to a friend or family member. However, if you would rather borrow funds from someone with professional lending experience, you can apply for a loan through a private loan company not tied to a bank or a credit union. Private lending companies typically offer the same loan types as more traditional financial institutions.

Online Lenders

Online lenders have become increasingly common in recent years due to their convenience and speed. Many online lenders offer a variety of mortgage loans and personal loans for borrowers to choose from. While some people have concerns about the safety of working with an online lender, your personal information should be just as safe with a reputable online lender as it would be when applying for a loan with a traditional bank or credit union.

Mortgage Lenders

It’s possible to get a mortgage loan through all of the above lender types, but these organizations have various subsets of mortgage lenders you can work with. In many cases, you’ll work with a direct lender or a retail lender, which includes institutions like banks and credit unions that originate their own loans and take borrowers through the mortgage approval and closing processes without the assistance of a third party like a mortgage broker.

You might also work indirectly with a wholesale lender, meaning your interactions would remain solely with the financial institution you’re borrowing from but a third party would then sell the mortgage loan on the secondary market after closing. You might even work with hard money lenders – private companies or wealthy individuals who use tangible assets like your home to back the value of the loan – if you’re struggling to get approved with more traditional mortgage lenders or need to get approved for a purchase quickly.

When deciding on the type of mortgage lender for you, make sure to conduct thorough research so you’re aware of all of your options and can properly assess which one will best fulfill your home-buying needs.

Student Loan Lenders

There are a few types of student loan lenders you can work with if you’re looking to borrow money to help pay for tuition. You can apply for private loans through a bank, credit union or online lender, but many people also apply through federal student loan programs funded by the U.S. Department of Education.

What Makes A Good Lender?

When the time comes to decide on which type of lender you’d like to work with, there are a few core characteristics to seek out so you have the best borrowing experience possible. Here are a few traits of a quality lender:

They’re Knowledgeable About The Loan Type You Need

If you’ve never applied for a loan, the process can seem overwhelming. As you weigh your lender options, make sure the one you ultimately choose can demonstrate that they have sufficient knowledge and experience to answer your questions and support your financial goals.

They Have Your Best Interest At Heart

When choosing your lender, be careful to avoid lenders who just try to get the most money out of you. Instead, make sure your lender will charge fair fees and interest rates that accurately reflect the current market. They should want to help you find a loan option that meets your needs without breaking the bank.

They Have A Good Reputation With Previous Borrowers

Customer reviews are often a very honest representation of the service you can expect from a lender, so as you research your borrowing options, take time to browse some feedback your prospective lenders have received from past and present borrowers. If the reviews are generally positive, there’s a good chance you’ll have a similar experience with that lender.

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Working With A Financial Lender: What You Need To Know

Borrowing money is a major commitment. It’s likely you’ll be paying your debt back over the course of months or years, so it’s crucial to be prepared for that level of responsibility when applying for a loan.

If you’re at all worried about keeping up with loan repayment or you feel that it would put too much of a strain on your finances, it might be wise to hold off on applying until you can handle the commitment more comfortably.

If you’re planning to work with a lender in the future, it’s important to take steps to prepare your finances early. Pay down other debt you might already have, line your savings, build up your assets, and establish an emergency fund. The more you can do to reduce your risk of loan default, the better you’ll look to prospective lenders and the better your loan terms will be.

Final Thoughts

Lenders provide qualified borrowers with the opportunity to live more freely by giving them greater access to homeownership, education and personal expenditures that will add enjoyment to their days.

As long as you feel prepared to take on the responsibility of making consistent loan payments for the foreseeable future and you apply for a loan from a lender with integrity, there’s a good chance your experience with that lender will be a success.

Ready to work with a trustworthy and experienced lending platform? Apply online with Rocket LoansSM today!

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Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.