Brokers and lenders play a vital role in helping people borrow money. However, one should not be confused with the other.
In this article, we’ll look at the key differences between them, how they work together to secure funding, and the pros and cons of using each of them.
Lenders vs brokers - The differences
A broker is a person or business that acts as the middleman between the borrower and the lender. In other words, they act as an intermediary; so they do not lend you the money themselves. Often, brokers have access to a wide range of lenders and loan solutions. This means that they may have a higher chance of being able to find you a suitable product that meets your needs.
A lender is the entity that provides the funds to the borrower, for example, a bank or building society. You repay the money you borrow to the lender, based on the terms you agree to when you apply for the loan. By going directly to a lender, you cut out the middleman from the process.
How do brokers work with lenders?
Essentially, brokers help borrowers connect with lenders, which can often make it easier to get a loan.
First, they research and identify providers that align with the borrower's needs. This involves considering factors like interest rates, terms and conditions.
Once the broker finds a suitable solution, they provide the borrower with all the information. If the parties are ready to proceed, they give them the paperwork and can help them understand the terms and conditions of the loan.
Once the paperwork is signed, they proceed to work with the lender to get the funds released to the borrower.
The broker deals directly with the lender so that the borrower doesn’t have to. Lots of people opt to use them for this reason, as it can save them valuable time.
Usually, a fee is charged for the service both the broker and lender provide. This can contribute to the overall cost of your loan, so it’s important to bear this in mind. Make sure you know how much they will charge when you apply.
Can you go directly to a lender?
Yes, you can go directly to a lender. By doing this it means dealing with the provider yourself, submitting your loan application, and negotiating terms without assistance from a broker.
While some borrowers prefer the direct approach for more control, others may choose brokers for their expertise and assistance in navigating the process.
Going directly to a lender might be cheaper as you avoid broker fees, but there's a higher risk of rejection if you don't meet their criteria. Brokers, on the other hand, can help you identify lenders likely to approve your application, which can save time and increase your chances of success.
What are the benefits of a mortgage broker?
- Access to exclusive rates and solutions: Brokers can sometimes provide access to rates and solutions not directly available from lenders. This means that you could access more favourable terms.
- Expert assistance for challenging cases: Borrowers facing difficulties getting funding directly from lenders often turn to brokers. They can assess the borrower's complete situation and recommend tailored solutions, making it possible for those who may have been rejected in the past to get the funding they need.
- Efficiency and reduced effort: Working with a broker minimises the effort needed from the borrower. Instead of contacting multiple lenders and comparing options independently, the broker handles this for you. This can save time and reduce stress.
What are the negatives of using a broker?
- Broker fees: Using a broker typically involves paying a fee, which can vary in price. Some may charge a percentage of your loan amount as a commission, while others may have a set rate for every client. It's crucial to be aware of these fees upfront.
- Reputation matters: Not all brokers have the same level of reputation and reliability. Before working with one, check customer reviews online to ensure they are trustworthy. This step helps you avoid potential delays and bad service.
- Limited access: Brokers offer access to a range of lenders, but there are situations where specific providers or deals may not be available through them. Not all brokers have access to every lender in the market, so you must research carefully before selecting one.
What are the benefits of going directly to a lender?
- Direct process efficiency: Going directly to a provider can speed up the application process, especially if you already meet their criteria. Some may give a straightforward 'yes' or 'no' answer, enabling a quicker application review.
- Avoid extra fees: Bypassing a broker means you won't incur their fees. Therefore, it may be a more cost-effective option for you.
- Personal control: By going direct, borrowers may feel they have more control over the decision-making process. They can choose a lender based on their preferences and make decisions without relying on anyone else’s recommendations.
What are the negatives of using a lender?
- Potential for less favorable terms: Going directly to a lender may result in less favourable terms compared to working with a broker. You do not have the benefit of being able to compare lots of different solutions. Instead, you are limited to their specific products and criteria.
- Meeting lender criteria is crucial: When dealing directly with a lender, it's essential to meet all their criteria. Failing to fulfill every requirement increases the chances of getting rejected.
- Risk of credit score decline: Multiple rejections by a lender can negatively impact your credit score. It's important to determine if the lender conducts a soft or hard credit search, as hard inquiries are recorded on your credit history, potentially affecting future finance opportunities.
Summary
A broker acts as an intermediary between the lender and the borrower. Choosing which one you should use depends on your situation. A lender offers set criteria; if you meet it, the process can be relatively quick and simple. However, if you want to access better rates or have had issues getting a loan before, a broker may be more suitable.
