Many people think that
all financial institutions are banks, but that is not really true.
Learn how the primary types of lenders differ. And, discover which lender might
be the best for which purpose.
Lender Types
Many people have deposited money in checking and savings accounts at their local bank. Originally, this money was the main source of capital; it was reinvested into loans for individuals and businesses. But, the modern world of finance has become much more complicated.
Nowadays, there are many more sources for capital. Banks are not the only financial institutions with access to capital. Lenders might receive their capital from a number of the following sources:
- Savings
- Investments
- Wall Street
- Federal Reserve
- Shares
This capital source will impact who the lender targets for loan, how much money is available and the cost of said loans. It is important for you to know the characteristics of your lender to get the best loan terms and conditions.
You can choose from a variety of types of lenders. The good news is that there has never been more variety. For our purposes, we will discuss the following 4 types of lenders:
- Big Banks
- Small Banks
- Credit Unions
- Private Lenders
Borrowers have plenty of options – big banks, small banks, credit unions and private lenders, such as Gladiator Lending – borrowers can more easily find the best financial institution offering the best loan. Each lender will target a different client. The required loan application documents might vary drastically. Those with bad credit might have more luck with one specific type of lender as opposed to another.
We will discuss banking history and how legal reforms have changed the industry. Many people need money immediately. Nevertheless, some lenders might want to develop a strong, long-term relationship with you before providing you with financing.
Each financial institution has its own risk tolerance. Hopefully, by reading this Lender Type Review, you can find the best lender to fit your needs.
Big Banks
Did you know that the five largest banks in the United States control more than 45% of the financial industry? In 2008, you might have heard reference to the “Too Big To Fail” (TBTF) banks. These are the financial institutions that are referred to by that name.
The names on this list might change, but they tend to have a long history – having been founded more than a century ago. Each bank has its own loan specialty, but they will tend to dominate their financial sector. Many of these banks also received bailouts in 2008.
After the bailouts, there has been more government oversight of these big banks. These banks have even chosen to adhere to international laws from Basel, Switzerland. The large institutions have branches all around the world. They also have naming rights for many sports’ arenas, stadiums and centers.
Clients:
The largest banks prefer to have wealthy, celebrity, multinational corporations or governments as clients. There might be a lot of paperwork, but large organizations have accountants to fill out the loan applications.
Decision Making:
Local branches might be able to accept the loan applications but might lack real decision-making authority. Therefore, your loan application might take time to process, since it is being sent to global headquarters in another town.
Risk Tolerance:
Big bank risk tolerance has become more politically-oriented, especially after the 2008 bailouts. There are numerous stress tests. These large banks have made their application process more restrictive, handing out fewer loans to average applicants.
Small Banks
During the Great Depression, there were some banks operating in several states. They engaged in rather speculative activities, which might have partially caused the financial collapse. In order to solve these problems, the Glass-Steagall Act of 1933 was passed, which prohibited interstate banking.
Heretofore, most banks had been local concerns. If you look closely into state laws, they have very precise provisions for their banks. After the Great Depression, local community banks started to gain prominence again.
But all that changed in 1994. The Riegle Neal Act of 1994 repealed the prohibition against interstate banking. Thereafter, banks could open branches in other states. Now, interstate and even global banking has become accepted.
Nevertheless, many community banks have continued to rise. In fact, most of the big banks started out as small local banks. The small banks focus on local community financing needs.
Clients:
If the community has a lot of farmers, then agriculture loans might be predominant for the small bank. Usually, everyone knows one another in small towns. Most local borrowers also have accounts with the local community banks.
Decision Making:
Due to its local nature, most decision-making can be completed by the local branch manager. Small lenders don’t have a lot of paperwork or red tape. Small banks tend to have a better understanding of who their clients are and what they need.
Risk Tolerance:
Most small banks are rather conservative. They might want to build a relationship with you, before they offer you a loan. Their risk tolerance is rather low, they have fewer assets and can’t afford having too many non-performing loans.
Credit Unions
A credit union offers membership to people who have common hobbies, interests or careers. In general, these individuals will pool their financial resources to accomplish a specific goal. Throughout history, communities have worked together to achieve noteworthy communal goals.
A modern, digital version of the credit union is crowdfunding. Both operate on a similar concept – the like-minded should pool their financial resources to improve the world.
Credit unions are owned and operated by their members. They are not-for-profit enterprises with a tax-exempt status.
Clients:
For better or worse, the clients of credit unions are also its members. Therefore, you might be required to open an account with them before you get a loan. Some groups, like mailmen, might have their own credit union.
Decision Making:
Credit union decision-making is local. And, unlike the for-profit banks, credit unions might make their decisions based on philanthropic and charitable criteria. This could be beneficial for those with bad credit.
Risk Tolerance:
The risk tolerance of a credit union is medium. The focus is more on improving the community and less on turning a profit.
Private Lenders
Due to the 2008 bailout, more of the large banks are under indirect control of the government. The government has made them public in many respects. These large public banks must pass numerous stress tests and have very stringent lending terms and conditions.
This is what occurs with all governmental entities. The government has very precise rules and regulations that the large banks are required to adhere to. Private lenders have more freedom over their lending decisions, they have the independence to determine whom they lend to.
Some of the private lending firms have financial professionals who specialize in very specific types of loans. Small boutique lenders can use their skills to construct exotic loans. They might have a different funding source than the large banks do.
Generally, the Federal Reserve System has changed its source of funding from deposit-based to United States Treasury based. The US Treasury prints the dollars in the fractional reserve banking system and distributes the money to its member banks. Private lenders might receive their funding from wealthy individuals, shareholders or other sources.
Clients:
Many private lenders will target borrowers that might have been refused by the mainstream banks. The causes for refusal might have included bad credit scores, inadequate documentation or few assets. The private lenders might be willing to lend to small business owners, entrepreneurs and the self-employed.
Decision Making:
Private lenders have a very flat decision-making structure. This allows them to have lower overhead. They might have less paperwork and focus more on whether they believe you are trustworthy or are investing in potentially lucrative asset classes.
Risk Tolerance:
Due to their relative independence, many small lenders, such as Gladiator Lending have more leeway with respect to loan applications. They might have financial professionals who specialize in bad credit or very exotic loan packages. Gladiator Lending and other private lenders might still approve your loan, after a bank has refused your application.
Therefore, some might call these lenders “last chance lenders.” These non-traditional lenders might be able to handle higher risk. Their high risk tolerance might allow them to approve more loans with costlier repayment terms and conditions.
Borrowing Money Is Easier
Having choices is always a good thing. Now, you need to find the right financial institution for you. Sometimes, your credit score is not ideal, but some lenders are better for those with bad credit. Borrowing money has never been easier than it is today.