When it comes to sourcing external financing through a loan, you typically have two options – you can either use a direct lender or, alternatively, a broker. But what’s the difference between the two and which is the best option for your financial situation? Let’s take a closer look…
What’s the difference?
The difference between a direct loan lender and a broker is actually pretty simple. A broker acts as the middle-man in your search for a loan, collecting information about your financial status and other requirements to find the most suitable lender and loan option for you. They don’t lend you any money directly and, subsequently, you’ll never owe your broker any repayments, however you will be subject to paying commission and/or broker fees.
With a direct lender, on the other hand, you’ll have to do the searching yourself as a result of removing the middle-man from your search. When opting to borrow from a loan lender, you’ll be subject to extensive credit and affordability checks before, if accepted, entering into a binding loan agreement directly with your lender.
Borrowing from a loan lender
- By searching for your financing options yourself, you avoid the unnecessary additional fees that a broker will charge you. For those in particularly tough financial situations, avoiding such fees can make a significant difference
Because your loan agreement is directly with the lender, you have a more direct line of communication should any problems arise throughout the borrowing term
- It can take a long time to search and compare all available loan options in the hunt for the best deal. If you urgently require external financing, you may not have the time to thoroughly research your options, meaning you enter into the wrong loan agreement for you
- Because brokers often work with multiple lenders, it’s typically harder to secure a loan with a direct loan lender than when using the former. Loan lenders will perform extensive credit checks on you and, as a result, there’s no guarantee you’ll be accepted
Borrowing from a broker
- Brokers take a lot of the stress out of searching for a loan by doing the hard part for you. By using a broker, you’re likely to find a better deal, as the options available are often far more extensive than those offered by a direct lender
Because brokers work with a panel of lenders, many offer 100% acceptance for loans guaranteed. For those struggling to pass the strict finance checks of direct loan lenders, this can be a very appealing prospect
- Though you’re far more likely (and sometimes even guaranteed) to be accepted when using a broker, this doesn’t necessarily mean you’re going to get a good deal. You’re still subject to all the same finance checks when borrowing through a broker – you’re just more likely to be paired with a provider that is willing to lend to a person of your financial status. The result of this, however, can often be very high interest rates for a small borrowing amount
- When using a broker, you’re going to be subject to further fees – commonly, these come in the form of broker fees or commission. As a result, it’s important you consider whether you can afford these additional fees on top of your loan repayments. What’s more, some brokers will charge these fees upfront, leaving you in an even more strenuous immediate financial situation – all before the loan has even landed in your account
Which option is right for me?
Deciding whether a broker or direct lender is the best option for you very much depends on your own circumstances. It’s vital you factor in both your ability to pay fees and repayments as well as the urgency of your loan requirement into your decision making, remembering to check that any broker or lender you eventually opt for is authorised by the Financial Conduct Authority before entering into any binding agreement (you can do that by checking them against the Financial Service Register here).
The Jolly Good Loans blog is full of further financial tips and advice, and remember, if you’re experiencing financial difficulty, there is always help available. Head over to the Citizens Advice website or call the free national debt helpline on 0808 808 4000.