With more than 78 percent of the workforce living paycheck to paycheck, loans are often the only way to make ends meet when times get tough.
However, finding a good loan can be challenging even during the best of times. Not only do you need to compare terms, but you also need to figure out how to apply for a loan in the first place.
You have two main choices: work with a direct lender or partner with a loan broker.
Both options are a great way to get the money you need. Here’s what you need to understand about the differences between them so you can make the best choice for your financial situation.
What a Loan Broker Is
A loan broker is an individual that is intimately familiar with the loan industry. They’re familiar with different lenders in the area and know what each lender looks for when deciding to issue a loan.
Brokers often work independently rather than partnering with a financial institution or bank. They network with lenders both locally and across the country to give their clients access to a wide variety of loan options.
Some brokers specialize in specific types of loans while others can help you find just about any type of personal loan you need.
How They Help You
It’s a broker’s job to help their clients make informed financial decisions. They help prospective borrowers by analyzing their financial situation and helping them find a lender that will be willing to work with them.
Once they have an understanding of your needs, your credit score, and your finances, they can start helping you find the best loans possible. Brokers compile quotes and loan details from multiple lenders at once, saving you the time and frustration of having to get quotes from direct lenders individually.
All you have to do is tell your broker exactly what you’re looking for. They’ll take care of the rest.
When you hire a broker, you’re gaining access to their experience and knowledge. If you have questions, they’ll answer them. If you’re worried about low credit scores or other financial concerns, they’ll do what they can to find lenders that will work with you.
Once they have a list of lenders in-hand, they’ll be able to discuss the benefits and potential pitfalls of each lender. While you’ll always be free to choose a lender based on your preferences, your broker can give you advice that will help you save money in the long-run.
There Are a Few Downsides
Since you’re getting a lot out of each interaction with your broker, you will have to pay a fee to use their service. After all, they’re putting in the time and effort to help you find the best loan options for your needs. However, those fees can add up if you’re not careful.
Further, you have no way of guaranteeing that the broker’s interests are the same as yours. Remember, brokers, get paid by the lending company, too. It’s in their best interest to recommend loans that will earn them the highest commission amounts.
Before you choose a broker, make sure you understand what their fees are, how they’ll help you, and the types of commissions they’ll earn. It’s also a good idea to ask if they base their decisions on the commissions they’ll receive or their clients’ needs.
According to the experts at Money Trumpet, this question shows the broker that you’re serious about your loan options and value transparency from the brokers you’re working with. Reputable brokers will always do what’s best for your financial situation and will be able to explain how they do just that.
What a Direct Lender Is
A direct lender is the loan issuer. This could be a private business, a bank, or even a credit union.
Their employees review your finances to determine if you’re a good candidate for a loan based on their business’s unique requirements. If they determine that you’re eligible for a loan, they’ll issue the loan to you themselves.
Like brokers, the representative you speak with will be able to discuss the terms and conditions of each loan in detail so you’ll never have to worry about what you’re getting into.
The Benefits of Working with a Direct Lender
When you work with a direct lender, you won’t have to wait for several weeks before you receive a decision on your application. Since you’re applying to the lender itself, you’ll get a decision in a matter of days in most instances.
You may also be able to get a better interest rate and terms from the lender than you’d receive if you used a broker. This is because the lender won’t have to pay a commission to a broker and may be willing to pass some of those savings onto you.
There Are a Few Cons
While direct lenders can be a great option, they’re harder for some people to work with. You’re in charge of researching the lender and understanding the terms and conditions of the loans you’re offered.
You’ll also have to apply to multiple lenders to get several quotes which mean you’ll spend a lot more paperwork and time spent on the application process.
Which Option Is Best for Your Needs?
If you’re struggling to decide between working with a direct lender or a broker, think about what you want out of the application process. Are you willing to put in the time to research your options and contact multiple lenders or do you want someone to do that for you?
There is no right or wrong answer and deciding to work with a loan broker or a direct lender is largely a matter of personal preference.
The most important thing is that you get a loan that works for your budget. In most cases, the loan you get from a direct lender vs broker will be identical and will help you cover expenses as needed. Just make sure you understand the loan terms before you accept the money and you’ll be in good shape.
If you’re looking for more details on what to look for in a lender, check out our recent posts.
