What is a lender? Financial terms to know

Many of the most important financial transactions we make – getting an education, buying a home, consolidating debts – are made possible by taking out a loan. Who you borrow money from matters, so it’s important to understand what a lender is and what it means to work with one.

What does ‘lender’ mean?

A lender is an individual or institution that lends money. Borrowers typically apply for a loan and must meet specific requirements to assure the lender they can repay what they borrow plus interest. Lenders usually establish the specifics of a loan, including how much interest is charged, how interest is calculated, and how much time the borrower has to repay the loan.

What does a lender do?

Lenders make money by charging borrowers interest on what they borrow. They evaluate the risk of lending to each applicant, considering their credit history, income, and other debts. Lenders usually review the following:

• Your credit score and credit history
• Your debt-to-income (DTI) ratio
• Your assets, debts, and investments

Low-risk borrowers are usually approved for loans easily and offered lower interest rates than borrowers less likely to repay the loan.

Some loans require the borrower to put up collateral. If the borrower defaults on the loan, they forfeit the collateral to the lender as compensation for its losses. Loans requiring collateral are called secured loans. Mortgages and auto loans are secured loans.

An unsecured loan requires no collateral. Student loans and personal loans are examples.

Lenders will fund the loan, calculate interest and payment information, and collect and track payments until the loan is paid off.

Types of lenders

Choosing the right type of lender depends on what you need a loan for and how you want to interact with your lender.

Traditional banks and credit unions

Banks and credit unions are the most common places people turn to for a loan. Both offer common loans such as mortgages, personal loans, and car loans, but there’s a key difference between them. Banks are for-profit businesses, while credit unions are nonprofit organizations owned by their members. Banks may offer broader access and digital tools, while credit unions often provide more personalized service and potentially lower rates.

Private lenders

If you want to borrow money in a more informal capacity, you can ask 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 company that is unaffiliated with a bank or a credit union. Private lending companies typically offer the same loan types as more traditional financial institutions, often with less regulation or government oversight.

Online lenders

Online lenders offer loans through the internet or mobile apps. Online lenders provide everything from personal loans to mortgage options, all without going to the bank in person. Some specialize in specific types of loans, such as mortgages, while others offer multiple types of loans.

It’s natural to wonder if online loans are safe. The good news? Trusted online lenders use strong security measures, like encryption and multifactor authentication, to protect your personal information and finances. Stick with well-reviewed, regulated lenders who are transparent about their terms so you can borrow with confidence.

Mortgage lenders

To buy a home, you’ll need a mortgage instead of a personal loan. Mortgage lenders specialize in loans for buying real estate. They typically offer a wide range of mortgage options, from conforming conventional loans and jumbo loans to loans backed by the Federal Housing Administration, Veteran Affairs, and U.S. Department of Agriculture. The lender originates and processes the loans it issues and guides the borrower through approval and closing. When deciding on a mortgage lender, do your research to find the right loan and lender for you.

Student loan lenders

There are a few types of lenders you can work with if you’re looking for a student loan. Many students apply with federal student loan programs funded by the U.S. Department of Education, which is the direct lender. You also can apply for private student loans through a bank, credit union or online lender.

Federal student loans come with valuable benefits you won’t usually find with private loans, such as low interest rates, flexible repayment plans, and potential loan forgiveness. But they might not cover your full cost of attending school. Private loans often fill the gap once you’ve maxed out your federal aid.

What makes a good lender?

A good lender doesn’t just offer money – it provides guidance, transparency, and a commitment to your financial well-being. Here are three things to look for:

1. They’re knowledgeable about the loan type you need

As you weigh your lender options, choose the lender with experience and a track record of making the type of loan you need. Make sure the lender answers your questions quickly and clearly.

2. They have your best interests at heart

Make sure your lender charges fair fees and interest rates that accurately reflect the current market conditions. Your lender should want to help you find a loan option that meets your needs without breaking the bank.

3. They have a good reputation with previous borrowers

Customer reviews are often a good representation of the service you can expect from a lender. As you research your borrowing options, read through 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.

Final thoughts: Choose the best lender for you

The right lender can open doors, whether you’re buying a home, getting a college education, or simply opening options in your day-to-day life. Loans can be a powerful financial tool when used responsibly, and choosing a reputable lender is the first step toward success.

If you are prepared for the responsibility of making loan payments and apply for a loan from a reputable lender, 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 Loans℠ today.