# Understanding Lenders: Types, Decisions, and Loan Qualifications

## What Is a Lender?

Lenders, ranging from financial institutions to private investors, play a crucial role in providing funds to individuals and businesses with the expectation of repayment. They thoroughly assess credit histories, collateral, and financial health to decide on loan approvals. This article dives into what lenders look for, the different types of lenders, and the factors impacting their decisions.

### Key Takeaways

*   Lenders can be individuals, groups, or financial institutions that provide funds with the expectation of repayment, often with interest.  
    
*   Loan approval for individual borrowers often depends on factors such as credit history, FICO score, and debt-to-income ratio.  
    
*   Business loans require lenders to assess personal and business balance sheets, projected sales, and the business owner's character.  
    
*   Different lenders, such as angel investors or banks, have their own criteria for lending to businesses or individuals.  
    
*   Understanding the full loan terms and being able to afford the repayments is crucial before borrowing money.

![Lender: An organization or person that lends money.](https://www.investopedia.com/thmb/HYhE8GrEf0nMvYSLp7ljdBFMoNo=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Lender_final-b1e90ef0ddb443aab06957e352e812f0.png)

*— Investopedia / Michela Buttignol*

## Understanding How Lenders Operate

Lenders provide funds for a variety of reasons, such as a home mortgage, an automobile loan, or a small business loan. Loan terms specify the repayment period and the consequences of missing payments or defaulting. A lender may go to a [collection agency](https://www.investopedia.com/terms/c/collectionagency.asp) to recover any funds that are past due.

## Factors Influencing Lender Loan Decisions 

### Loan Decision Criteria for Individual Borrowers 

Qualifying for a loan depends largely on the borrower’s [credit history](https://www.investopedia.com/terms/c/credit-history.asp). The lender examines the borrower's [credit report](https://www.investopedia.com/terms/c/creditreport.asp), detailing current and past creditors, credit types, and repayment history. The report helps the lender determine whether—based on current employment and income—the borrower would be comfortable managing an additional loan payment. As part of their decision about creditworthiness, lenders may also use the [Fair Isaac Corporation (FICO) score](https://www.investopedia.com/terms/f/ficoscore.asp) in the borrower’s credit report.

> **Important**
>
> The lender may also evaluate the borrower’s debt-to-income (DTI) ratio—which compares current and new debt to before-tax income—to determine the borrower’s ability to pay.

[When applying for a secured loan](https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp), such as an auto loan or a [home equity line of credit (HELOC)](https://www.investopedia.com/mortgage/heloc/), the borrower pledges collateral. The lender will make an evaluation of the collateral’s full value and subtract any existing debt secured by that collateral from its value. The remaining value of the collateral will be the [equity](https://www.investopedia.com/terms/e/equity.asp) that affects the lending decision (i.e., the amount of money that the lender could recoup if the asset were liquidated).

The lender also evaluates a borrower’s available [capital](https://www.investopedia.com/terms/c/capital.asp), which includes savings, investments, and other assets that could be used to repay the loan if income is ever cut due to a job loss or other financial challenge. The lender may ask what the borrower plans to do with the loan, such as use it to purchase a vehicle or other property. Other factors may also be considered, such as environmental or economic conditions.

### Evaluating Loan Applications for Business Borrowers

Different lenders have different rules and procedures for business borrowers.

Banks, [savings and loans](https://www.investopedia.com/ask/answers/041015/what-difference-between-savings-loan-company-and-bank.asp), and [credit unions](https://www.investopedia.com/terms/c/creditunion.asp) offering [Small Business Administration (SBA)](https://www.investopedia.com/terms/s/small-business-administration.asp) loans must follow the program's guidelines.

Private institutions, [angel investors](https://www.investopedia.com/terms/a/angelinvestor.asp), and [venture capitalists](https://www.investopedia.com/terms/v/venturecapitalist.asp) lend money using their own criteria. They consider the business purpose, owner's character, location, and projected sales and growth. These lenders will also look at the purpose of the business, the character of the business owner, the location of business operations, and the projected annual sales and growth for the business.

Small-business owners prove their ability for loan repayment by providing lenders both personal and business [balance sheets](https://www.investopedia.com/terms/b/balancesheet.asp). The balance sheets detail assets, liabilities, and the net worth of the business and the individual. Although business owners may propose a repayment plan, the lender has the final say on the terms.

## Where Can I Get a Small Business Loan?

One good lender option for small business borrowers is the Small Business Administration (SBA), a U.S. government agency that promotes the economy by assisting small businesses with loans and advocacy. The SBA has a [website](https://www.sba.gov) and at least one office in every state.

## What Are the Different Types of Mortgage Lenders?

The three most common options for borrowers seeking a mortgage lender are [mortgage brokers](https://www.investopedia.com/terms/m/mortgagebroker.asp), direct lenders (e.g., banks and credit unions), and secondary market lenders (e.g., [Fannie Mae and Freddie Mac](https://www.investopedia.com/articles/economics/08/fannie-mae-freddie-mac-credit-crisis.asp)).

## How Can I Get a Mortgage With Bad Credit?

[Getting a mortgage when you have bad credit](https://www.investopedia.com/the-best-mortgage-lenders-for-bad-credit-11697459) is possible, but a larger down payment, mortgage insurance, and a higher interest rate will likely be required.

## The Bottom Line

Lenders play a crucial role in providing funds for personal and business needs, expecting repayment with interest or fees. When borrowing, consider the lender type—whether traditional institutions like banks and credit unions, or modern options like angel investors and online micro-lenders. Evaluate the lender's reputation, understand loan terms including interest rates and fees, and ensure your ability to repay. For business loans, presenting solid financial statements can be key. Aligning loan use with financial goals and maintaining a strong credit profile will enhance borrowing outcomes.

> **Article Sources**
>
> 1.  Wells Fargo. "[How to Get a Loan: Learn What Lenders Look For](https://www.wellsfargo.com/goals-credit/smarter-credit/credit-101/getting-a-loan/)."
>     
> 2.  Bank of America. "[How Debt-To-Income Ratio (DTI) Affects Mortgages](https://bettermoneyhabits.bankofamerica.com/en/home-ownership/mortgage-debt-to-income-ratio)."
>     
> 3.  U.S. Small Business Administration. "[Loans: Eligibility requirements](https://www.sba.gov/funding-programs/loans)."