What Is a Direct Loan?
A direct loan is exactly what its name implies. It is a direct loan, made directly between a borrower and lender without any intermediary in between. In a direct loan agreement, the lender is usually a conventional bank, credit union, unconventional lenders and/or the government. Direct loans are cheaper and can be processed faster than indirect loans.
Indirect loans involve a lot of third parties between the lender and the borrower. These third parties cause the cost of loan to rise, as each party involved in the transaction gets a cut or commission.
Consider a small loan bank for instance. If a small bank runs out of money to lend, it borrows some from a larger bank. The larger bank is therefore a third party in this transaction which is funding the transaction. The larger bank will therefore earn a commission over this. This commission drives the cost of loan up for the borrower because the small bank is not going to pay for the commission out of its own pocket. Any loan can be a direct loan if there is no intermediary involved in the process.
Let us now look at different types of direct loans.
What Are Direct Payday Loans?
Payday loans are considered predatory in nature by many, this happens because mostly the pay day loans involve a third party which is responsible for bringing the lenders and the borrowers together.
This third party therefore takes a cut and this causes the cost of the payday loans to go higher than it already is. These third parties are called loan brokers and they act as facilitators of loans.
Nowadays brokers have taken the form of online sites that collect borrower information and then use it to match it with lenders willing to lend to the borrowers, based on a pre set criteria. Once the borrower and the lender agree on a loan contract, the broker then gets a commission as a percentage of the total loan value.
Direct payday loans can take out the brokers from the equation and make the loan slightly cheaper for the borrowers. Payday loans whether they are direct or indirect, serve as a last resort for borrowers. They are meant to be financial fire fighting equipment and should only be chosen when the borrower has run out of absolutely every other option.
While going for a payday loan, the borrower should have a plan in place to pay back the loan. Signing up for a payday loan without any plan will make one go down a spiral of indebtedness because payday loans as mentioned above are predatory in nature and carry high interest rates and penalties if not paid back on time.
What Are Direct Installment Loans?
Installment loans are a type of personal loan that can be of varying term lengths. They can be
- Medium or
- Long term loans
that require to be paid off in installments. They are usually offered by banks, on fixed or variable interest rates and on manageable monthly payback terms.
A direct installment loan is one which does not involve any intermediary between the lender and the borrower. As we have discussed so far, a direct installment loan is cheaper because there is no broker to pay, it is also faster as the borrower and the lender can directly negotiate the terms and conditions.
What Are Direct Mortgage Loans?
Mortgage loans also come in two main categories, they can either be direct or indirect. Most people go for indirect mortgage loans because mortgage loans are considered to be more on the difficult side.
Mortgage brokers are therefore the third party that gets involved between the lender and the borrower in order to facilitate the mortgage. Mortgage brokers can be quite useful especially for borrowers who either do not know much about mortgage loans or do not have enough time to shop for the best deals on their own.
Mortgage brokers can make the strenuous process of finding the best mortgage deal very easy, at a cost for the lender. Brokers charge a fee or percentage for their work and rightly so.
Using a broker however ends up increasing the cost of the mortgage loan and borrowers can cut this cost down by doing their own due diligence, spending some time to look for the best deals and directly negotiating with the lender in order take out their mortgage loans.
If however you do not have much knowledge about the housing market or the process of a mortgage then it is advisable to use the services of a mortgage broker instead of trying to link with a mortgage lender directly.
What Are Direct Federal Student Loans?
Student loans are offered by both the federal government and private lenders in order to aid and assist students with their higher studies. The loans can be given out to students directly or to their parents and guardians.
The federal government offers student loans to help pay for education related expenses. These loans are provided to both students and their parents, and they usually come with lower interest rates to help facilitate the pursuit of higher education.
The government funded student loans are administered by the US department of Education that manages the William D. Ford Federal Direct Program, which is the only government administered student loan program in the US at present.
Private lenders also offer student loans but their loans carry higher costs and have less features as compared to the government administered student loans. Student loans depend to a large extent on the schools location and the number of applicants in that school. Schools are usually given a quote or a set limit of funds which can be distributed as student loans.
1) Direct Subsidized Loans
Direct subsidized loans are for students in dire need of financial assistance in order to continue their studies. The interest on these loans only starts accumulating once the students have completed their education and have started working. This therefore is a very light burden on student debt.
2) Direct Unsubsidized Loans
These are the exact opposite of the last category of loans discussed. These are offered to every student regardless of their financial need. Interest starts accumulating on these loans as soon as they are given out.
3) Direct Consolidation Loans
DIrect consolidation loans are those that combine different educational loans into a single lumped up category, thereby eliminating multiple loans and merging them together into a single category for easier management.
4) Direct PLUS loans
Direct PLUS loans are available for graduate, under grad and professional students. These loans can also be given out to the parents of students in order cover for the education expenses. Direct plus loans are not linked with the financial need of a student and therefore any student regardless of their financial situation may apply for a direct plus loan.