• Direct lenders approve and fund the loan.
• Brokers are intermediaries that can help direct your application to the right lender.
• By putting your application in front of the right lender, you can fast-track loan approvals.

What Is a Direct Lender?

A direct lender is a company that loans you money directly. You apply to the lender, and they assess your application based on the lending criteria they have. 

If approved, they fund the loan and manage the repayments. Examples of direct lenders include banks, payday loan companies, and subprime lenders who specialise in offering loans to people with poor credit histories.

What Is a Credit Broker?

A credit broker, on the other hand, doesn’t lend money directly. Instead, they act as an intermediary, matching you with lenders that are most likely to approve your loan. 

Brokers work with a panel of lenders and can present you with different options based on your financial profile. Brokers often have expertise in working with subprime lenders, which makes them a good option for borrowers with poor credit.

Advantages of Using a Broker

1. Time-Saving

Applying for a loan through a broker can save you time. Rather than filling out multiple applications for different lenders, you can apply once with a broker, who will then match you with a lender from their panel. This makes the process quicker and more efficient.

2. Greater Access to Lenders

Brokers often have access to subprime lenders who cater specifically to borrowers with bad credit or those who may be financial excluded from legacy lenders for numerous reasons.

If you’ve been turned down by a traditional lender, a broker may be able to find you a loan with a more specialised lender. This is particularly valuable for individuals with poor credit scores, as brokers work with lenders who are more flexible in their criteria.

3. Better Chances of Approval

A credit broker’s main advantage is their knowledge of each lender’s criteria. They can match your financial situation to the lender most likely to approve your loan. This reduces the chances of being declined and avoids unnecessary credit checks, which can negatively impact your credit score. Brokers help you avoid the trial-and-error approach of applying directly to multiple lenders and getting rejected.

How Lenders and Brokers Make Money

Both direct lenders and brokers need to make a profit, but they do so in different ways.

Direct lenders earn money through the interest and fees they charge on the loan. Everything is handled directly by the lender, from the application process to the loan repayment.
 
Credit brokers typically earn a commission from the lender when they successfully match a borrower with a loan. In other instances, they may charge a fee either after approval or as a service fee requiring payment upfront, with no guarantee of approval. 

Be careful with brokers offering guaranteed loan approvals because they cannot make that guarantee as tehy are not the lender. All they can do is assist you with the application process. 

Transparency and Regulation

Both lenders and brokers in the UK are regulated by the Financial Conduct Authority (FCA). This ensures they operate under strict guidelines designed to protect consumers. Before applying for a loan, it’s crucial to check that both the broker and lender are fully authorised and regulated by the FCA. This helps you avoid any rogue operators or unregulated lenders who could put you at risk of unfair lending practices.

Make sure to review the terms and conditions carefully, especially when working with a broker. While many brokers are transparent about their fees and commissions, it’s important to know exactly what you’re agreeing to before accepting any loan.

When Should You Use a Direct Lender?

If you’re confident in your eligibility and prefer dealing directly with the loan provider, applying to a direct lender can be the right choice. By working directly with the lender, you have more control over the process and can communicate directly with the company that will be funding your loan. 

Some borrowers prefer this approach because it’s simpler—they know exactly who they’re borrowing from, and they avoid any middlemen or potential broker fees.

When Should You Use a Credit Broker?

A credit broker can be particularly useful if:

• You have poor credit: If you’ve struggled to get approved for loans in the past, a broker can help match you with lenders who are more likely to approve your application. Brokers work with lenders that specialise in bad credit, so they have access to subprime options that you may not find on your own.
• You want to save time: If you’re not sure which lenders to apply to or want to avoid applying to multiple lenders, using a broker can save you time. Instead of submitting several applications and possibly harming your credit score, the broker handles the search for you.
• You want to improve your chances of approval: A broker’s expertise in matching your profile with the right lender reduces the likelihood of rejection, which can help avoid multiple hard credit checks that can affect your score.

Understanding Credit Brokers’ Lending Panels

Credit brokers work with a panel of lenders, which gives them a broader range of loan options to present to you. These lenders often include subprime lenders who are more willing to offer loans to borrowers with poor credit, including those who may have CCJs and similar negative markers on their credit report.

Brokers have a thorough knowledge of each lender’s criteria—such as minimum credit scores, income requirements, and acceptable types of employment or benefits. This expertise allows brokers to match you with a lender that is more likely to approve your loan, making the process smoother and more efficient for borrowers.

Drawbacks of Using Brokers

While using a broker can offer many advantages, there are some potential downsides:

• Multiple Credit Checks: Some brokers perform a soft credit check to assess your eligibility, which won’t affect your credit score. However, when your application is passed to lenders, they may perform hard credit checks, which could temporarily lower your score if you apply to several lenders through the broker.
• Fees: While many brokers don’t charge borrowers directly, some may include fees, either upfront or added to the loan. Make sure to choose brokers who are transparent about the fee structure, and always ask about any additional charges before proceeding with a loan.