Loans from a Bank Vs. Loans from a Direct Lender

by Carol Adams Financial Adviser

We all feel the need for loans at some point in our lives when we need to fund some big purchases like a house, our dream car, a child’s higher studies, etc. There are situations in everyone’s life when their personal savings become inadequate, and they resort to borrowing.

The sources of borrowing money are not limited as one can borrow from his friend, colleagues, family, neighbor, etc. These are informal sources of borrowing money as the lender is known to you. However, there are formal sources that offer significant loan amounts. These sources include commercial banks, P2P lenders, direct lenders, etc.

The latter category of borrowing is what we will discuss in this blog as the majority of the borrowers reach out to them only for loans. There are many direct lenders in the UK, offering fast loans with no guarantor to even bad credit borrowers. Their loan application and approval process are entirely online and super quick.

Let’s look at some of the differences between when you take a loan from a conventional commercial bank versus when you take from a direct lender.

· Application Process

The process of Every loan starts with filling and submitting a loan application form. While taking a loan from any commercial bank, a borrower needs to visit their branch to either fill the application or submit his financial documents.

On the flip side, if you approach a direct lender, their loan application process is entirely online. It means you won’t have to take a day off from work or leave your office in between to visit their branch.

Also, the loan application takes 5-10 minutes to be filled and submitted, along with uploading documents of income proof and business financials. Also, the loan gets disbursed to your loan account on the same day it gets approved by the direct lender. Thus these are quick loans.

· Loan Requirements

Suppose your loan amount is higher or your credit history is even slightly sub-standard. In that case, commercial banks ask you to pledge any of your security as collateral against the loan. In some cases, they also ask for a guarantor to be produced on your behalf to represent you.

However, direct lenders offer unsecured, i.e. collateral-free loans without any guarantor. Also, to be eligible for getting a direct loan, one has to be an adult and a permanent UK citizen with a bank account in any of the banks’ in the UK.

· Loan Approval Criteria

Commercial banks run many background checks and credit checks on the borrower’s profile before giving approval or rejection decision on any loan application.

Banks run strict credit checks to anticipate the credit risk in lending and accordingly approve or reject the loan. They also assess all the financial statements submitted by the borrowing companies and accordingly make projections of their future sales.

On the other hand, direct lenders do offering loans for unemployed and entrepreneurs do not do any such strict credit checks. They lend you even if you don’t have a job currently. They focus more on borrower’s future ability to repay, unlike the banks who rely on their history of repayment.

Also, your credit score is further exacerbated if the bank rejects your loan application which is not the case with direct lenders.

· Interest Rates

This is one area where you can negotiate and make conditions in your favor when you are dealing with a direct lender. There is a possibility of negotiating terms and conditions of a loan with a direct lender. You can set the tenor of the loan apart from the monthly installment amount.

Remember that your monthly installment determines your monthly cash outflow. It is possible as there are online loan calculators on the direct lender’s website, which will let you know your monthly liability based on the loan amount and its tenor.

Also, when you are applying for a loan from a direct lender then, you can sit with the lender and chalk out a repayment plan in consultation with him. This plan will be in accordance with your cash flows based on your monthly cash inflow or your income.

However, you don’t have that luxury when you are dealing with a commercial bank as the bank fixes the interest rate along with other T&Cs.

· Repayment T&Cs

This is one area where you can negotiate and make conditions in your favor when you are dealing with a direct lender. There is a possibility of negotiating terms and conditions of a loan with a direct lender, you can set the tenor of the loan apart from the monthly installment amount.

Remember, that your monthly installment determines your monthly cash outflow. This is possible as there are online loan calculators on the direct lender’s website which will let you know your monthly liability based on the loan amount and its tenor.

However, you don’t have that luxury when you are dealing with a commercial bank as the interest rate is fixed by the bank along with other T&Cs.

· Miscellaneous Charges

There are loan processing fees and hidden application charges usually when you apply for a loan with a commercial bank. However, when you approach a direct lender, there are usually no such hidden charges of concealed fees. Everything is black and white, with no grey areas.