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CREDIT 101

What types of lenders are there?

There are different kinds of lenders, and what you’re buying often dictates what kind of lender you’ll need. Here are some descriptions to keep in mind when considering credit providers:

  • Banks - Just as there are many types of lenders, there are also different kinds of banks. Commercial banks provide money services to individuals, families and businesses. Online-only banks operate over the internet, savings banks focus on mortgages, and community banks focus on local markets.
  • Credit Unions - Credit unions are not-for-profit, member-owned, financial cooperatives that range in size from small, volunteer-only operations to large entities with thousands of members. Members pool their finances to loan money to each other and achieve financial benefits.
  • Credit Card Companies - These are the financial institutions (in most cases, banks and in some others, credit unions) that issue credit cards to consumers and service their accounts.
  • Credit Unions - Credit unions are not-for-profit, member-owned, financial cooperatives that range in size from small, volunteer-only operations to large entities with thousands of members. Members pool their finances to loan money to each other and achieve financial benefits.
  • Consumer Finance Companies - These financial institutions do not take deposits, but specialize in providing loans directly to consumers who are unable to secure bank loans. They generally charge higher interest rates than banks.
  • Retailers - Retailers often sell merchandise or services on credit to their customers. In the past, retailers managed these credit accounts themselves, but today, most retailers outsource this financial function to private label lenders or one of the major credit card issuers.
  • Captive Auto Finance Companies - These are wholly-owned finance subsidiaries that exist for the purpose of making loans to customers who wish to buy their parent company’s auto product.
  • “Buy Here, Pay Here” Auto Lenders - These are car dealerships that finance the car loans themselves, rather than using banks or finance companies. They’re offered to people with low-income or bad credit, and often feature inflated automobile prices, high interest rates and aggressive payment policies.
  • Payday Lending Companies - These companies offer small, short-term, high-rate loans in which they essentially advance you one paycheck, post-dated check loans, or deferred deposit loans.
  • Title Loan Lenders - Here, lenders offer you cash for the title of your paid-for car to secure the loan. Some charge triple digit annual percentage rates, and if you can't pay back the loan, they may repossess your car, sell it, and keep 100% of the profit.

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