What are direct lenders?

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A direct lender is a financial institution that accepts, underwrites, approves and funds loan requests directly from its borrowers, without the assistance of a loan broker or intermediary. By contrast, a loan broker is an individual or company that does not provide financing for a borrower but rather helps connect borrowers with lenders or creditors and facilitate the loan application and approval.

The distinguishing point for most is that a direct lender makes a loan with its own funds. That means a direct lender can issue its own lending decisions, often without having to follow third-party lending guidelines. This gives direct lenders the flexibility to tailor its loan underwriting guidelines and funding process to best serve its own needs and market. A direct lender also has control over the interest rates and loan fees charged to the borrower.

Some direct lenders do approve loans based on third-party lending guidelines. For example, a bank can approve a primary mortgage loan application using loan guidelines set forth by federal home loan institutions such as Fannie Mae or Freddie Mac. Even when approving a loan based on a predetermined set of loan guidelines, direct lenders often have the ability to make exceptions to those guidelines.

Advantages of working directly with a lender

For borrowers, working with a direct lender may offer advantages:

  • Faster decisions. Because there is no intermediary, working with a direct lender may result in faster application processing, underwriting and approval. The borrower can provide documents directly to the funding lender – rather than relaying them through a broker.
  • Potentially lower cost. When brokers are involved in a transaction, they expect to be compensated. In some cases, it will be up to the borrower to pay the broker’s fees. In other situations, the broker will be compensated by the lender, which may pass on the added cost to the borrower.
  • Direct answers. If a borrower uses a broker, questions, special requests and answers are often given to the broker who then relays them to the lender or borrower. Borrowers who work with direct lenders can eliminate having to go through a broker and communicate directly with the lender’s processors, underwriters and customer service teams.

A direct lender can also establish its own market niche by specializing in a particular area of consumer finance. For example, some direct lenders specialize in issuing credit cards to those with less-than-perfect credit. Other direct lenders issue automobile loans requiring little or no money down or cater to the student loan market.

There are also advantages to working with knowledgeable brokers, as they have the potential to shop around and compare different options for the borrower.

Regardless of which route a borrower takes, it’s important to research either the loan broker or direct lender to ensure that they are trustworthy and reliable.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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