What is a 'Lender'
A lender is an individual, a public group, a private group or a financial institution that makes funds available to another with the expectation that the funds will be repaid, in addition to any interest and/or fees, either in increments (as in a monthly mortgage payment) or as a lump sum.
BREAKING DOWN 'Lender'Lenders may provide funds for a variety of reasons, such as a mortgage, automobile loan or small business loan. The terms of the loan specify how the loan is to be satisfied, over what period of time and the consequences of default.
When applying for a loan, a lender assesses credit risk based on the borrower’s credit/payment history, income and overall financial situation.
Factors Determining Loan Qualification
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. The lender may also evaluate the borrower's current and new debt compared to before-tax income to determine the borrower's debt-to-income (DTI) ratio. 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.
When applying for a secured loan, such as an auto loan or a home equity line of credit, the borrower pledges collateral. The value of the collateral is evaluated, 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 capital, including savings, investments and other assets that may be used to repay the loan if household income is insufficient. This is helpful in case of a job loss or other financial challenge.
The lender may ask what the borrower plans to do with the loan, such as buy a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.
Small Business Lenders
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 as well as the nature of the business, the character of the business owner and the projected annual sales and growth.
Repayment of Small Business Loans
Small business owners prove their ability for loan repayment by providing lenders both personal and business balance sheets detailing their assets, liabilities and net worth. Although business owners may propose a repayment plan, the lender has the final say on the terms.