A lender is an individual, a public or private group, or a financial institution that makes funds available to another with the expectation that the funds will be repaid, usually with interest. Repayment includes the original amount loaned, referred to as the principal, plus the agreed-upon interest. The terms of repayment, including the interest rate and duration of the loan, are set out in a loan agreement.
Lenders can offer a variety of loan types, including personal loans, mortgages, auto loans, student loans, and business loans. The lender earns income from the interest paid on loans and risks losing the principal if the borrower defaults on the loan repayment.
Examples of lenders include:
- Banks: These are the most common type of lenders, offering a wide range of loans to individuals and businesses.
- Credit Unions: These are member-owned financial cooperatives that provide credit to their members.
- Online Lenders: These are digital-first companies that provide loans and credit products primarily through online platforms.
- Private Lenders: These are non-institutional lenders that provide loans, including real estate investors and peer-to-peer lending platforms.
- Government Institutions: These provide loans for specific purposes, such as student loans or small business loans.
It’s important for borrowers to understand the terms of any loan agreement, including the interest rate, repayment schedule, and any potential penalties for late payment or default. Different lenders and loan types may have very different terms and conditions, so it’s a good idea to shop around and compare loan offers before committing to a loan.
Example of a Lender
Here’s a simple example of a lender-borrower relationship.
Let’s say John wants to buy a home costing $200,000 but he only has $40,000 saved for the purchase. To cover the rest of the cost, he decides to take out a mortgage—a type of loan specifically designed for real estate purchases.
John goes to his local bank, Reliable Bank Inc., to apply for a mortgage loan. After reviewing John’s credit history, income, and other relevant factors, Reliable Bank Inc. agrees to lend him the remaining $160,000 he needs to buy the house.
In this example, Reliable Bank Inc. is the lender. They provide John with the funds he needs now in exchange for John’s promise to repay the loan over time, with interest. The specific terms of John’s mortgage might include a 30-year repayment period and a 3% annual interest rate.
In case John fails to repay the loan as agreed, the bank has the right to take possession of the home (the collateral), sell it, and use the proceeds to repay the loan. This process is known as foreclosure. The ability to take the collateral in case of default reduces the risk for Reliable Bank Inc. and is a common feature of many types of loans.