4/22/2021 Lender Definition

PERSONAL FINANCE LOAN BASICS

Lender
By ADAM BARONE | Reviewed by THOMAS BROCK | Updated Apr 4, 2021

TABLE OF CONTENTS
What Is a Lender? Understanding Lenders
How Do Lenders Make Loan Decisions?
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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. [1] 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. [2]

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KEY TAKEAWAYS
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) or as a lump
sum.

Understanding Lenders
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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.

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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
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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. [3]

Important: 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. [4]

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. [3]

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. [3]

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. [5]

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.

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Related Terms
Five C's of Credit
The Five C's of credit (character, capacity, capital, collateral, and conditions) is a system used by lenders
to gauge borrowers' creditworthiness. more

Personal Loan
A personal loan allows you to borrow money and repay it over time. Here’s what a personal loan is, how it
works, and how to use one. more

Mortgage Definition
A mortgage is a loan typically used to buy a home or other piece of real estate for which that property
then serves as collateral. more

Mortgagor Definition
A mortgagor is an individual or company who borrows money from a lender to purchase a piece of real
property. more
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Credit Scoring
Credit scoring generates a score that ranks, on a numerical scale, the credit riskiness of an individual or a
small, owner-operated business. more

Character Loan Definition

A character loan is an unsecured loan made based on a borrower’s reputation and credit, rather than a
loan secured by a property. more

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