What is the difference between a direct lender and a broker?

For consumers looking into various loan possibilities, in particular online, the “face” of the lending industry may actually be a broker rather than a direct lender. “What’s the difference between the two?” You ask. Good question. These two important figures play very different roles. Knowing the difference between them and how each can help you is very useful information that can save you money while assuring the best deal on your loan.

What is a loan broker?
A broker seeks out loan customers and acts as the middleman for property mortgages and sometimes other types of loans.  A facilitator for the loan search process, he or she will look on your behalf for the lending institution which offers the optimal interest rate and other terms that best suit your individual situation.

Frequently, a broker will describe the types of loans available from several lenders, guiding you to choose the one most suitable for your needs. He or she will also assist you with the loan application process, including difficulties such as a problematic credit record. The broker is sometimes compared to a loan retailer, while the direct lender is the wholesaler.

What is a direct lender?
The direct lender refers to the person or institution that will provide the actual cash loan. The lender reviews the application submitted by the broker on your behalf and make the final decision as to whether to grant you the loan you’ve requested.

As a borrower, you will be responsible for making payments to the direct lender according to the loan contract to be signed by the two of you. The direct lender’s profit on the loan comes from the interest and other fees that you pay, minus a commission to the broker for playing a major role in the process.

Advantages and disadvantages of working with a broker
The broker saves you time and hassle by doing the “footwork” of investigating different loan possibilities. Good brokers tend to have reliable contacts at lending institutions, which they can rely on to review and process loan applications quickly. Potential lenders might be willing to offer you better terms via a veteran mortgage broker, in the hopes of attracting more business through him or her.

On the other hand, a broker may not act with your best interest in mind, but instead will steer you in the direction of a loan that will bring him the most profit. Not all lenders are willing to work with brokers, especially one who is new to the field. The broker’s commission may more than make up for any savings obtained for you by his negotiations. You may prefer to do the footwork yourself, negotiate with several direct lenders and save the cost of the commission.

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