Brokers vs Lenders, Which Should I Use When Getting a Loan?
Updated: April 26, 2024 Author: Paul Gillooly
Quick answer: Comaprison websites are classed as brokers and can give you a wider scope when searching for a loan which could mean finding a better deal. Some lenders may not be found on some comparison sites so it also can help to shop around.
When you’re looking to borrow money, there are two routes available:
- Look for options yourself before applying directly to a lender.
- Go through a broker, who will find and arrange the loan for you.
Most people used to go directly to lenders such as banks and building societies. But with fewer branches of banks and building societies available, and more complex rules making loans harder to navigate, more people are going to brokers. Whether it’s for a mortgage, a personal loan, or money to improve a business, brokers are becoming the default route to borrowing.
But are they the best option?
What’s Involved in Arranging a Loan?
To understand the difference between working with a broker or a lender, it’s important to start by understanding loan applications.
There are three elements to arranging a loan:
- Getting your details in order.
- Finding the right deal.
- Making the application.
The first part involves preparing for what lenders will want to see. That means getting your existing money and financial assets in order, along with evidence for them. You’ll need to gather identity documents and other evidence of who you are and how secure your finances are. It’s worth arranging a credit check, so that you know what lenders will find, and so that you can take steps to improve your credit score if needed. And to make sure you make the right choice, you’ll have to work out what you can afford to borrow and to repay, given your income and outgoings.
Next comes finding the right deal. This involves identifying lenders who might be suitable for you and comparing the deals they offer. Comparisons aren’t always straightforward. While interest rates are important in understanding what a loan will cost, the other terms of the loan also matter, and the wrong decision could cost you a lot.
Then there’s the application process. FCA rules mean that lenders have to ask borrowers increasingly complex questions about their lives and finances. It can be a difficult process, and small mistakes can cause significant delays.
Put together, that’s a lot of work to deal with, for high financial stakes.
What Does a Financial Broker Do?
A financial broker arranges lending between a customer and a lender. It’s their job to take the work off your plate, finding better finance more quickly than you’d manage on your own.
Brokers are specialists in finding the right loan, with knowledge of the available options and networks of contacts who can help. They don’t lend the money themselves, but make a living off fees they charge to lenders or borrowers in return for connecting them.
In the UK, mortgage brokers come under FCA regulations. They have to give impartial advice, increasing the chances that they’ll find the best option for you, instead of one where they’re friendly with the lender.
While they’re working for you, a broker’s job is to become an expert on you and your financial needs, as well as the lenders you could use. They’ll gather together your evidence and information, checking for anything extra a lender might want. They’ll look for loans with terms to suit you, then check your eligibility for those loans. Having helped you to identify the right lender and loan, they’ll arrange the application and make sure that everything is in place to maximise your chances of success, avoiding a rejection that might show up on your credit record.
In short, a broker is an expert middleman.
How Does a Broker Compare Loans?
Interest rates are the most important factor in assessing a loan, but they’re not the only one. Other parts of the agreement will affect what a loan costs you in the long run. These included whether the rates are fixed or variable, early repayment charges, any extra fees for administering the loan, the payment schedule, and the length of the contract.
Brokers’ experience lets them balance these factors and make complex judgements on what the real cost will be. They’ll also work out what sort of repayment schedule will fit your finances and dreams for the future.
A broker already has a lot of information on different lenders and products that you would otherwise have to gather. Their comparisons are likely to be quicker as well as more accurate.
Advantages of Getting a Loan Through a Broker
A broker will gather quotes for you, then provide an impartial comparison based on their expertise and experience. Along the way, they’ll filter out irrelevant options, so that you don’t waste time on them.
They’ll also look after your application, taking on a lot of the administrative work, reminding you of any tasks you need to do, and chasing up the lender to avoid delays. Providing a second pair of eyes and a strong understanding of the application process, they’ll reduce the risk of mistakes in the application, which in turn reduces the risk of a delay, or worse yet rejection. If an application becomes complicated, for example needing extra evidence, they can help you to navigate it.
Because of their professional networks, brokers will provide options that aren’t available going directly to the lender. Some of this happens because they’re more aware of changing markets, so notice when products are added or withdrawn. But there are also deals that lenders don’t put up on the price comparison sites or that they’ll only offer through brokers. There are even lenders who only work through brokers. As a result, a broker can often provide better terms on a loan, including lower interest rates.
Brokers can be particularly useful for people who lenders might consider a high risk, including those with bad credit. An experienced broker can help persuade lenders that you’re worth taking on, while helping you assemble the evidence to prove it. Some specialise in these cases.
Disadvantages of a Loan Broker
If everything about working with a loan broker was good, then everyone would use them. So what are the reasons why you might prefer to go straight to a lender?
The most obvious is that a broker will charge you a fee. If they end up arranging a loan that you would have found on your own anyway, that means they’ve cost you extra. But if they find you a better deal, you’ll probably save more than you spend on them.
Working with a broker can take extra time, because of the need to talk decisions through and for communication with the lender to go through them. But this lost time is often balanced against the time you gain by avoiding mistakes and not having to gather information for yourself.
There is one area where the disadvantage doesn’t easily balance out, and that’s access to lenders. While there are lenders who only work through brokers, there are others who go the other way, and who will only lend to direct applicants. A broker can’t help you with these lenders, so if you think that one of them would be best for you, then you might want to apply to them directly instead.
How to Find the Right Loan Broker
If you decide to work with a broker, then there are plenty to choose from.
Personal recommendations are often the best way of finding someone for you. If someone you know has had a good experience with a broker then you can be more confident that you’ll be able to work well together, and that they’ll find a good deal.
Online reviews and ratings can also help, but be careful with these. Some less scrupulous brokers might pay for reviews and ratings to make their business look better. Watch out for reviews that don’t seem quite real.
When you’re sifting through the brokers, look for what sort of service they’re offering. A “whole of market” or “fully independent” broker will give you the widest range of options to choose from, as they’re not limited in the lenders they work with. One who’s “tied” or “multi-tied” has connections to specific lenders, which might mean they can offer specific deals others can’t but will definitely mean they’re choosing from fewer options.
Final Thoughts
In the end, your loan is going to come from a lender, so the question is whether you work with them directly or through a broker. While there are a few advantages to going direct, the experience and expertise of a broker will usually get you a better deal and make the process easier for you.