Lender

What Is a Lender?

A lender is an individual, a public or private group, or a financial institution that makes funds available to a person or business with the expectation that the funds will be repaid. Repayment will include the payment of any interest or fees. Repayment may occur in increments, as in a monthly mortgage payment (one of the largest loans consumers take out is a mortgage) or as a lump sum.

Understanding Lenders

Lenders may provide funds for a variety of reasons, such as a home mortgage, an automobile loan, or a small business loan. The terms of the loan specify how it must be satisfied, its period, and the consequences of missing payments and default. Ultimately, a lender may go to a collection agency to recover any funds that are past due.

How Do Lenders Make Loan Decisions?

Individual borrowers

Qualifying for a loan depends largely on the borrower’s credit history. The lender examines the borrower’s credit report, which details the names of other lenders extending credit, what types of credit are extended, the borrower’s repayment history, and more. The report helps the lender determine whether the borrower is comfortable managing payments based on current employment and income. Lenders may also use the Fair Isaac Corporation (FICO) score in the borrower’s credit report to determine creditworthiness and help make a lending decision.

The lender may also evaluate the borrower’s debt-to-income (DTI) ratio comparing current and new debt to before-tax income to determine the borrower’s ability to pay.

When applying for a secured loan, such as an auto loan or a home equity line of credit (HELOC), the borrower pledges collateral. An evaluation will be made of the collateral’s value, and the existing debt secured by the collateral is subtracted from its value. The remaining equity affects the lending decision.

The lender evaluates a borrower’s available capital, which includes savings, investments, and other assets that could be used to repay the loan if household income is insufficient. This is helpful in case of a job loss or other financial challenges. The lender may ask what the borrower plans to do with the loan, such as use it to purchase a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.

Business borrowers

Banks, savings and loans, and credit unions may offer Small Business Administration (SBA) programs and must adhere to SBA loan guidelines. Private institutions, angel investors, and venture capitalists lend money based on their own criteria. These lenders will also look at the purpose of the business, the character of the business owner, where the business operates, and the projected annual sales and growth for the business.

Small-business owners prove their ability for loan repayment by providing lenders both personal and business balance sheets. The balance sheets detail assets, liabilities, and the net worth of the business and the individual. Although business owners may propose a repayment plan, the lender has the final say on the terms.