Lending money to the borrower generates the major business of financial institutions that provide lending services to their customers. However, instead of providing loans to individual customers, some institutions choose to invest in loans, debentures and other securities of the customers.
Institutional lenders are large financial organisations that use the money of their depositors or customers to invest in deeds of mortgages or other trusts and add them to their own portfolios.
Institutional lenders have a regulated system of pooling and investing funds. Some examples of institutional lenders are commercial banks, pension funds, mutual funds etc.
Institutional lenders are also the prime source of many real estate loans. They pool the funds of their clients and depositors and invest them in real estate loans in order to generate interest income. For a person who is looking to raise a loan for buying a house or other real property can choose from different alternatives of loans available.
Here are some of the major differences between private and institutional lenders are:
Since institutional lenders are governed under strict rules, their lending policies are also often strict. They have various qualification parameters that a prospective home buyer must qualify to be able to raise loans from an institutional lender. On the other hand, private lenders are often more flexible and not as rigid at times.
Since it is easier to raise loans from private lenders, their rates are also higher compared to institutional lenders. The primary reason behind this is private lenders grant loans to people who may not qualify for institutional loans, thus increasing the chances of loan default. Whereas financial institutions run a thorough background check before granting any loans, thus ensuring the chances of default are very low.
Private lenders mostly use their own money to grant loans to the borrowers. Whereas institutional lenders lend money from the pool of funds that they accumulate from their depositors and customers.
The mortgage loans from institutional lenders often come in fifteen and thirty-year term loans. Whereas this can vary with the pirate lenders based on the understanding between the borrower and the lender.
The process to raise loans from private lenders is comparatively flexible with lesser fees and processing charges. On the other hand, institutional loans come with various fees over the interest rates to fulfil the formalities and process the loans.
