Payday loans and other short term loans are becoming more and more popular, and there are an increasing number of lenders popping up. They make sense, most people only want to borrow a little bit of money over a short period of time to help them through a spot of financial hardship – they don’t want the commitment of getting a larger loan for something relatively small. If you’re looking for a short term loan you will likely have come across the terms “direct lender” and “broker” – it can be confusing if you don’t know what they mean.
So what are direct lenders and brokers, and what do you need to know about them?
As the name implies, a direct lender is a lender that lends to you directly. Makes sense, doesn’t it? When you apply for a loan with a direct lender, you make one application to that lender and that lender alone. They review it against their list of essential criteria, and if you make the grade they will grant you the loan. When the loan is granted, you are being paid by the lender you applied to directly from their own money.
With a direct lender everything you do is in relation to that one particular lender – your application, your payment, your repayments, and everything to do with your communication around the loan will involve that one lender and that lender alone. Your whole loan application process will involve that lender directly.
For a long time direct lenders were the most common type of loan company, however with the rise of technology and customers wanting the best deals possible, brokers are now also increasing in popularity.
A broker is a company that takes your one application, and basically offers it up on your behalf to multiple partners to see who can offer the best deal. Brokers don’t just exist in the loan industry, there are also insurance brokers for example who offer a similar sort of service to their customers. They have multiple partners, who may not offer loans directly to customers, and can often get you a variety of offers back on your application.
You make your application with the broker, they then tender it out to their partners who essentially “bid” on your application to make you the offer of the loan. Whoever makes the best deals generally gets to offer you their services, and you will have your choice of companies to choose from. The broker will often take a fee for their service.
If you want to get the largest number of offers for the smallest amount of effort, a broker is the way to do it.
The main advantage of a direct lender is the simplicity that comes from dealing with just one company regarding your loan – you make your application to them, you are paid by them, and you make your repayments to them. That makes it so much simpler to keep track of your communication, as you won’t have to think about the name of your broker and then remember which of their partners actually ended up providing the loan to you.
It makes communication that much faster – when you have a query it can be dealt with directly by the team of the direct lender, they will be able to pull up your case straight away and help you. With a broker you may have to communicate through the broker too, which adds an extra potential for delay.
If there happen to be issues with your repayments, again, it’s easier to deal with a direct lender because you can just simply get in contact with them. They can decide the terms of the loan and the repayments that they’re happy with, there’s no need to go between any sort of “middle men” to get you the answers that you need. This can go a long way to giving you peace of mind and keeping your repayments manageable.
The disadvantage of a direct lender is that they deal they offer you is the deal that you get. All lenders are under some obligation to keep their offers as competitive as possible – the market for loans continues to swell and nobody is going to take out loans at truly unreasonable rates. So there is some onus on them to keep up with the competition and offer the best possible deals they can – but you still get what you get.
You make one application for your loan, and the loan’s terms are what you will have. You won’t have the option of being able to pick and choose from a number of different offers in order to make sure you get the best deal – if that is the loan you want, you have to accept the terms that it carries or go elsewhere.
Another disadvantage is that you only make your application to the one lender. If you happen to be accepted, that’s great, but if you are not accepted for the loan or you decide you don’t like the terms, you’re going to have to go through the application process again with another lender. This means your application will have to be made, processed, and approved all over again – this can be painfully time consuming if you need money now.
The advantages of brokers mostly centre around convenience. Unlike a direct lender, with a broker your one application can be reviewed and processed by multiple lenders. You make one application to the broker, and they then pass it on to their multiple partners for consideration, and those for whom you meet the lending criteria will have the option on offering you the loan that your’re looking for. This is highly time-efficient.
That means if you’re in a hurry to get the money you need, you know you can have your application reviewed by multiple lenders at once. As such, if you happen to not meet the criteria of one lender, there will almost certainly be another for whom you do, who will offer you the loan that you’re looking for. It means you don’t have to waste valuable time re-applying for the loan via a different lender if you happen to get denied.
This also means you might have a better chance of getting a loan if you happen to have bad credit or an otherwise difficult financial history. There will be more lenders reviewing your application, so the likelihood is higher that more of them will still consider giving you the loan that you applied for.
Another benefit is that you might end up getting a better loan than you bargained for. Once all of the lenders have tendered their bids on your application, the broker will present them to you. This means you can easily see who is offering the best interest rates or repayment options, and choose the right loan for your needs. Whether you’re looking for shorter repayment length or lower interest, you can tailor your choice.
The disadvantage of brokers is that it can take a little longer to get a full selection of bids on your application. When you apply to a direct lender they take your application, review it, and give you a decision – if you’re accepted you are granted the loan, if you’re not you aren’t. It’s as simple as that. With a broker you have to wait for each partner to review your application against their terms and make their offer.
Brokers have honed their services to keep as competitive as possible in the marketplace, so you won’t have to wait much longer, but it’s worth considering if you really need your money in a hurry.
Something else to consider is the fees. The broker isn’t offering their service as a charity, it’s a business, so they will need to be paid. Some brokers choose to do this through a simple upfront fee, and others decide to do it by taking a small commission from the lender who is successful in offering your loan. That lender is almost certainly going to pass that cost back you somehow, so it’s something to be aware of.
The simple answer is neither and both. There’s no such thing as “better” because they both offer completely different services that will appeal to different types of lenders. It depends entirely on your circumstances whether you will prefer to make your application to a direct lender or tender it via a broker.
If, for example, you know exactly what kind of loan you want and you have taken out a similar loan with a certain company before, a direct lender will likely be the way to go. The company will already know you, will know you repaid on time, and will be inclined to grant you the loan you’re looking for as quickly as possible. Every lender wants to cultivate a relationship with reliable borrowers, so they will be your ideal choice.
If it’s your first time taking out a loan, however, or you are unsure of exactly what kind of terms you’re looking for, a broker might be the better option. They will be able to take your application and tender it to multiple lenders, who can then make you a subsequent offer. This will be the easiest way for you to see multiple offers at once, and compare and contrast which lender is offering you the best terms on the loan you want.
Direct lenders and brokers offer different paths to the same service – short term loans. It’s important, however, that you understand that a short term loan does not equal a long term financial solution to your problems. If you have serious issues keeping your head above water on a consistent basis, you should seek the advice and assistance of a dedicated debt management specialist. They can help point you in the right direction.
Short term loans have a very specific purpose – to give borrowers the option of the money they need to get them out of a financial pinch at short notice. They are not to be relied on, or depended on, on a consistent basis.
Before you apply for a short term loan through either a broker or via a direct lender, make sure you have the important information to hand. Understand exactly how much money you need to borrow, and work out what the monthly repayments that you can comfortably afford are. Do this ahead of time, and make a note of them, so you can refer back to them when you are made an offer on your application.
You should also, if possible, get a general idea of the types of requirements there will be in the application – whether or not you need references, for example. Most short term loans offer a quick and easy application process, but it’s good to make sure you have the important information you might need to hand. This means you spend less time actually making your application, and can ultimately get the money you need much faster.
There’s no right answer when it comes to direct lenders versus brokers – they both offer a way to get the money you need. If you value getting the best possible deal, you might want to consider using a broker to help you find it. If you want the money in the quickest, simplest way possible you might consider lending direct.
Make sure you understand the terms of your loan fully before you agree to anything, whichever method of lending you happen to choose. Sensible borrowing practice applies to both avenues. If you have any questions or any doubt, be sure you ask for clarification before committing yourself to loan terms you don’t fully understand.
Whether it’s direct lenders or brokers there is no right and wrong, there is only which works best for you.
Is the managing director of Cobra Payday Loans and Ready Money Capital Limited. He is responsible for all the day to day functions and performance of both companies and regularly contributes information on the short term finance sector. Stuart is an approved person with the Financial Conduct Authority, holding SMF3 (Executive Director) status.
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