Lenders and borrowers, what are they and differences between them?

It is far more frequent than it seems that people confuse the terms lenders and borrowers. This confusion can generate complicated mistakes when talking about loans.

Because of this from the web page of Lenders we wanted to write the following article so that you understand without any hint of error the difference between both figures. Would you like to know more? In that case, keep reading.

Differences between lenders and borrowers

Differences between lenders and borrowers

The simplest way to understand the difference between the two concepts is to explain them separately.

What is a lender

What is a lender

When talking about a lender we refer to that figure whose purpose is to offer a loan to a potential client. Lenders can be individuals or legal entities and act with their own capital or with that of the entity in which they carry out their professional activity.

In exchange for the loan, these professionals receive interest based on the level of risk that the operation they are financing will have. The interest will increase the higher the risk. In addition, certain lenders, depending on the profile of the client, will not offer credit. For example, traditional banks do not offer loans to customers with credit institutions.

For an individual or company to be considered as a lender it is necessary that there is a return agreement between both parties. Regardless of whether or not interests and commissions are included. That is to say, it must be a temporary loan in which a term of return of the capital is agreed.

If this obligation to return the loan does not exist, we will not be able to speak of the figure of the lender or of the borrower, since there will be no legal relationship or obligation of return between both parties. That is to say, what really turns this agreement into a loan and each of the figures in lenders and borrowers is the will to return the requested capital.

Types of lenders

Types of lenders

We can talk about three major types:

  • The banking type. They are undoubtedly the ones that most citizens try to use when they need liquidity. These loans are offered by banks. They usually offer very attractive interest and repayment terms. However, in order for these lenders to offer money, a large number of requirements must be met that the client is sometimes unable to meet.
  • Those that offer a source of alternative financing. The appearance of this type of lenders is becoming more frequent. As a general rule, these are platforms in which several private investors meet to finance a single client. They accept a higher level of risk than bank lenders in exchange for somewhat higher interest rates.
  • Individual lenders. This type of expert has a much greater funding capacity than banks. Mainly because they offer the opportunity to make loans with a level of requirements lower than that of financial institutions. In exchange for these loans they usually request a guarantee or guarantee to ensure that the capital will be returned.

What is a borrower

What is a borrower

When we speak of borrowers, we refer to the individual or company requesting the line of credit or loan. That is, the client seeking financing and will become the owner of the loan in question.

Becoming the owner of a loan involves acquiring both the rights and the obligations associated with the loan.

Luckily today there are many regulations that allow the figure of the borrower is protected by law to possible fraud or abuse by lenders. For these rights to be respected by both parties this type of financing is closed by contract. In this document, the rights and duties of both parties are included.

Among the fundamental rights that protect borrowers are undoubtedly the following:

  • Right to cancel the contract without costs or charges within a maximum period of 14 days from signature. The Law protects the borrowers so that they can cancel the contracts agreed with the lenders in a maximum period of 14 days. In case of not exceeding this period, they should not pay any kind of charge or interest. In case of exceeding 14 days must pay the borrowed capital together with the interest agreed by both parties.
  • Right to make an early refund. By law the borrower has the right to pay in advance the borrowed capital without interest being applied for it. However, it is important to verify that there is no clause in the contract that indicates otherwise. Many lenders include early repayment fees to avoid losing money in the transaction.

Types of loans

Types of loans

Just as there are different types of lenders there are also different types of loans. The lender can offer its clients two types of credits or loans. These are:

  • Loans without guarantee. These loans are characterized by having very high interest rates and a very short repayment term. For example, microloans or mini-loans would fall within this group. They are considered unsecured loans because in these cases the client can not offer enough guarantees to corroborate that he will be able to repay the loan.
  • Soft loans. This type of loans are those that have lower interest rates and longer repayment terms. They can be offered by financial entities or by individuals. In these cases, it is normal for the client to offer sufficient guarantees to demonstrate that he will be able to face the credit. An example of a soft loan would be the granting of a mortgage.