It may seem easier and more convenient to deal with brokers in obtaining a loan than with direct lenders. However, people fail to realize that you will eliminate juggling broker and bank relationships if you deal with direct lenders.
There are many advantages to dealing with a direct lender, but there are disadvantages as well. Before deciding to apply for a loan from a direct lender, you should be aware of these things. By doing this, you’ll be able to evaluate whether or not taking out a loan from these lenders is fit for your needs.
What is a Direct Lender?
A direct lender is a lending company or institution that provides loans, including banks and other private lending institutions. As the name suggests, the loan application goes straight to the direct lender, without a broker or middleman. These lenders may either be physical institutions or online entities.
Direct lenders have the money to fund your loan application. In some cases, they will use credit lines. These lenders already have employees who are experts in underwriting, closing, processing, and ensuring compliance so that your application will be processed accurately.
Direct lending works by raising capital from investors to be leveraged to borrowers. The direct lenders use the capital raised to fund a loan without broadcasting it to the institutional loan market.
Direct Lender vs. Loan Broker
The finance industry has various individuals and companies that can help people get the financing they need. These people are either loan brokers or direct lenders. These entities are different, even though they both help in providing loan options for borrowers.
A loan broker acts as a middleman or intermediary by helping people look for the best lender suitable to the client’s needs and repayment ability. Loan brokers are not lenders; they are professionals that deal with borrowers and lending institutions.
Loan brokers sit down with clients and discuss their financial needs and situation. They will gather relevant documents to evaluate how much a borrower is qualified to borrow. Once they find a lender that fits your needs, they will present a loan offer. They will also be responsible for communicating the loan application progress between the lending institution and the borrower.
On the other hand, a direct lender is the one directly lending money to the client. It does not require a middleman or intermediary between the borrower and a financial institution. They are the ones who evaluate the documents they need and will update the borrower directly on the loan application.
The key difference between a loan broker and a direct lender is the compensation. Loan brokers live for commission. These brokers might offer you a loan with a better commission on their part, rather than a loan plan that is more beneficial to you. Direct lenders, on the other hand, are compensated through application and origination fees.
Direct Lender vs. Correspondent Lender
A correspondent lender is a small lender who’s part of a big lender that funds the loan in its name but sells the loan to a direct lender that services the loan. They are extensions of a more significant direct lender. A correspondent lender charges additional fees associated with the loan application.
However, the direct lender is not a middleman or intermediary of a bigger lender. There is no need for an extra underwriting and payment of additional fees. The direct lender processes and approves the loan directly. The transaction with a direct lender is smoother than dealing with a correspondent lender.
Advantages of Dealing with Direct Lenders
One advantage of dealing with a direct lender is the timeline of the loan. They can process the loan faster, especially if they have an in-house underwriting. Since the process is in-house, everything is processed in one place. This also means that the updates on the loan application are timely and accurate.
Another advantage is the loan’s flexibility, especially if the borrower takes out loans with bad credit. Other banks require a specific credit score before they will allow a client to borrow money. Direct lenders ensure that borrowers will get the best terms for their needs and financial situation.
Lastly, you will save money if you deal with direct lenders. Dealing with brokers will only add to your expenses since they will charge additional fees for their services. Direct lenders, on the other hand, will only charge you processing fees and origination fees.
Disadvantages
One drawback of dealing with a direct lender is that you have to apply individually to each lender. When dealing with direct lenders, there are no brokers who will ask to gather your documents and assess your financial status.
Another drawback is the approval of your application. Direct lenders have their own underwriting and loan terms. The loan application can be denied if there are problems with your application that they can’t overcome. If this happens, you’ll have to start over a new application with a new lender.
Takeaway
Direct lenders are banks or lending companies that fund the loan application directly without the interference of a middleman or intermediary. It is cost-effective, faster, and more flexible than dealing with other people when obtaining a loan.
