If you have been looking for loans then you must have come across the term ‘lending’, which is also commonly referred to as ‘financing’. The two terms are interchangeable in the world of ban lending. However, people are often still confused about lending and what it means.
In this article, we’ll look at lending from a financial perspective and answer all questions you may have about the concept. In addition to this, we’ll also talk about the different types of lenders.
Now, without much ado, let’s get started and tell you lenders meaning:
What is a Lender?
A lender can be defined as a person, financial institution, or business that lends money to borrowers. The amount is given at a fixed price, which is known as interest, for a specified period of time.
In simple words, a lender issues loans. They earn a profit for parting with their money in the form of interest.
The interest rate depends on the level of risk involved. Lenders study different factors to calculate the applicable interest rate.
In some cases, lenders may ask for some kind of guarantee – typically known as collateral – before approving a loan application. Plus, terms and conditions may also differ from lender to lender.
Hence, it is important that you shop around before you choose a lender.
How Do Lenders Calculate Interest Rate?
In some cases, the interest rate is fixed and in some cases the interest rate depends on the applicant.
Lenders study different factors when issuing loans. These include:
- Credit History: They look at an applicant’s credit history to gauge how risky the investment is. It also gives them insights into the debt ratio.
- Credit Score: This three digit figure is one of the most important factors lenders consider when reviewing loan applications. If you have a bad credit score then you will have to bear a high interest rate.
- Earning Potential: This factor helps lenders decide how likely you are to return the money. For example, if you have no job then they may reject your loan application because you’d be less likely to make timely payments. Similarly, they will easily approve a $1,000 loan if you earn $3,000 or more per month.
- Type of Entity: While the opinion differs, most people believe that lenders charge businesses a higher interest rate than what they charge individuals. This is because the level of risk involved in issuing a loan to a business is higher than the level of risk involved in issuing a loan to an individual.
Other than this, some other factors may also be considered such as the amount of the loan, the type of lending, and the time period.
Who Can Be a Lender?
Technically speaking, anyone can be a lender. For as long as you have money to lend. However, charity or gifts do not qualify as loans since there is no promise to return the amount.
The concept will become clear in the next portion of this article where we have highlighted the several types of lenders.
Types of Lenders
Technically speaking, anyone who lends you money is a lender. However, we do not typically use the term anymore for traditional lenders anymore.
Still, to paint a true picture, we have covered some of the types of lenders:
- Self Borrowing: This may come as a surprise to people but you have the option to give loans to yourself. Some believe it can be a very creative way to earn money.
A good example will be lending money to your own business. You will earn profit or interest on this money.
- Borrowing from Friends and Family: You can take a loan from your friends or family members but make sure to get a lawyer involved so that everything is in writing.
Money matters can lead to fights and arguments between friends and family members. The best way to avoid issues is to be clear.
- Crowdfunding: This is a new but popular way of generating funds and it does not always include interest payments. However, the borrower has to issue some kind of a reward to the lender.
- Peer-to-peer: This involves lending money from other people. This can even be done online as many individuals are willing to offer loans to earn interest.
- Banks: When we think of loans, we usually think of banks. They are the biggest lenders and deal in millions but getting a loan approved from a bank can be tricky. Plus, there is a lot of paperwork involved.
- Financial and Other Institutions: Institutions including government organizations and even some NGOs offers loans to those in need. These loans come with less stringent terms and are typically easier to apply for.
- Online Agencies: Online agencies offer a variety of loans including payday loans. Such companies typically work with people who cannot get loans from other sources but they can be very expensive.
- Credit Unions: Most people go to credit unions when they have a bad credit score or when they cannot get a loan from other sources.
Where Can I Find a Lender?
It is quite easy to find a nearby lender. In fact, you can find some online and even apply for a loan on the internet. However, be careful as scams are common. Only work with a lender who is licensed. Do not work with unreliable lenders even if they offer low interest rates.
Other than this, always get the contract in writing and read the terms and conditions carefully to avoid confusions. You should be clear about the applicable interest rate, the timeline involved, etc.
Lastly, make sure to never be late on payments as doing so may get you into trouble. Lenders may charge you a hefty fee if you do not make timely payments. Some may even sue you or sell the collateral to recover money.
The best way to be safe is to apply for a loan only when you’re sure you’d be able to make payments. If you are in doubt, then consider working with a lender who offers unsecured loans so that you do not have to worry about losing your assets.