Do you consider yourself financially savvy? Are you confident you know most of what you need to know to make sound borrowing decisions? Before you answer, think about all the things you didn’t learn until after you started using credit. Hindsight might prove you are not as knowledgeable as you once thought you were.
There are any number of avenues we could explore to demonstrate just how complicated the financial services world is. But for this post, concentrating on the different types of lenders will be sufficient. Below are five of them. As you read, ask yourself how much you really know about them.
1. Banks and Credit Unions
Banks and credit unions are lumped together for the purposes of this post because of their many similarities in the retail market. Banks are for-profit institutions that make money by loaning out deposits. Credit unions are similar, except for being non-profit organizations. They still collect deposits and loan them out.
Both types of institutions are strictly regulated by Washington and the states. In addition to lending, they offer a full range of retail banking services including checking accounts, savings accounts, safe-deposit boxes, etc.
2. Private Mortgage Lenders
The mortgage industry enjoys plenty of competition between banks and private mortgage lenders. The latter are privately owned companies that lend their own money (not customer deposits) to home buyers.
What’s most interesting about private mortgage lenders is their tendency to sell mortgages to other financial institutions. They do so in order to mitigate risk. They will take the risk to initially underwrite a mortgage, but then they alleviate that risk by selling to a bank.
3. Hard Money Lenders
Hard money lenders are considered alternate lenders. They differ from private mortgage lenders in the sense that they do not provide retail mortgages. Instead, they offer hard money and bridge loans.
Salt Lake City’s Actium Partners is an example of a hard money lender. Their clients tend to be business owners, real estate investors, property developers, and the like. The two things that set hard money apart are the speed at which loans can be made and the fact that they are approved based on borrower assets.
4. Finance Companies
Perhaps the broadest category of lender is the finance company category. Finance companies run the gamut in terms of the types of transactions they will cover. One example is financing new furniture for your home. In all likelihood, the furniture store doesn’t extend credit. Instead, a financing company pays your bill at the time of purchase. You then repay the finance company.
The major auto makers all have their own finance companies. These companies are operated as subsidiaries with some measure of independence. The arrangement allows auto makers to make money on both the sale and the financing of a new car.
5. Credit Card Companies
Last up are credit card companies. They are regulated financial institutions that offer revolving credit to consumers. The biggest names in the industry include Visa, MasterCard, American Express, Discover, and Capital One.
Among all the different types of lenders, credit card companies rely most on interest. Why? Because the nature of revolving credit severely reduces the chances that credit card companies will ever be made fully whole. They rely on high interest rates to make up for that.
Borrowing money can be a complicated matter if you are not familiar with how the system works. Hopefully, this post illustrated as much by shedding light on various types of lenders. Rest assured there is a lot more to learn about lending and borrowing.