What’s the difference between a lender and a broker?

At first glance, the world of car finance can look complicated – but, we promise, it doesn’t need to be.
 
While there are a whole host of terms and acronyms out there, two of the most important that you need to know are broker and lender.
 
The simplest way to understand the difference between the two is that lenders are the source of money and brokers are organisations or individuals that can help introduce you to a lender.
 
A lender is an individual, corporation, or bank that provides car finance to a borrower in return for repayment with interest over a set period. The lender has the power to set its own eligibility criteria, approve or deny applications, and determine how much it’s willing to lend and how much interest it will charge in return. Some lenders specialise in one type of car loan like hire purchase (HP) or personal contract purchase (PCP) or will cater to a specific type of applicant like borrowers with poor credit scores.
 
Brokers don’t have control over any of those things. Instead, they work with a selection of different lenders to help their customers find finance deals that are right for their circumstances.
 
You could think of them a bit like a travel agent. When you book a holiday, the agent probably won’t be providing the accommodation or flights (or setting the prices), but they can organise all the details for you, coordinate with their hotel and airline partners, and process all the paperwork.
 
A broker can also help you compare the options available, liaise with the lender and dealership on your behalf, and get your agreement ready for you to sign. However, they don’t have any control over the finance products and interest rates available or whether you’ll be approved for a loan.

Why should I use a lender?

Lenders (like Carmoola) hold the purse strings. They are the ones who have the power to offer you the funds you need to buy your new set of wheels, and they’ll be the ultimate decision maker, even if you go through a broker or car dealer rather than applying directly to the lender.

There are several reasons why working with the lender directly might be the best choice for you:

They might be more flexible with their offer or provide exclusive deals

Going straight to the source means you might be able to unlock exclusive deals that aren’t available anywhere else. You also might be able to explain more about your individual circumstances. If your credit score needs some TLC for example, but you have a healthy deposit and strong affordability, speaking directly to the lender might mean they are more willing to offer you a deal.

They can streamline the process with one point of contact

One of the best things about working directly with a lender like us is that it’s one-stop-shop. We’ll handle your car finance journey from start to finish so you can have access to our friendly support team from the moment you apply to the day you finish making your repayments. Our team is available from 8am to 9pm (and we don’t like to brag but we have 4.9 stars out of 5 on Trustpilot!)

It can make the process faster

Not only can working with a lender directly streamline communication and make the process more straightforward, but it also means you might be able to get an approval faster (ideal if you’ve got your eye on a car that’s in high demand). In fact, in some cases, you could even get an approval the very same day. 

Of course, working with a lender isn’t the right choice for everyone. You might not have the same range of finance options to choose from as you would with a broker and the lender you choose might not be the right fit for your circumstances. Do your research first (time to flex those Google skills) to double-check whether the lender offers the types of loan you’re looking for before clicking that apply button.

What does a car finance broker do?

A car finance broker acts as a middleman between you and the lenders.
 
Typically, they’ll work with a panel of lenders so they can connect you with a range of different loan options and interest rates.
 
Their panel can also include specialist lenders that can offer finance to people with more challenging circumstances like a poor credit score, fluctuating income, and limited affordability.
 
With a broker, you don’t have to go it alone. Most will connect you with a personal account manager who can guide you through the car finance process, step-by-step. They can also communicate with the lender and the dealer on your behalf, so you can sit back and relax while they do the hard work for you (pop the kettle on and put your feet up!)

How do car finance brokers make money?

Car finance brokers offer several perks, but what’s the catch?
 
Well, in most cases, there isn’t one. Brokers typically collect their commission from the lender once you’ve landed on an agreement and signed on the dotted line – you won’t have to pay a penny!
 
However, it’s always worth checking the small print. Some brokers do charge a small administration fee as part of the process. In that case, it’s worth weighing up the pros and cons of using a broker for your personal circumstances. You might find that the convenience offered and the deal you can secure through a broker is worth more than the fees involved (time is money, after all).
 
It's also important to read the broker’s income disclosure statement. You should find this on their website, and it’ll let you know exactly how they earn money and whether it will affect the product and interest rate you receive (it shouldn’t!)

Why should I use a broker?

There are few reasons why a broker might be the best bet for you:

They could help you find the best deal on the market

By working with a panel of lenders, they can compare different options and help you find a loan type, term, and interest rate that’s right for your circumstances (like Goldilocks – they can find the one that’s just right).

They can potentially negotiate more favourable terms

As they have relationships with several different lenders, a broker might be able to negotiate on your behalf and get access to exclusive rates or products.

They can help you navigate the car finance process

When you apply with a broker, they’ll be on your side throughout your car finance journey. Not only can they help you find a deal, but they can also explain the nitty gritty of the agreement and support you through submitting all the paperwork.

They might improve your chances of securing finance

Many brokers will cultivate a panel of lenders that represents the whole market. That means they will work with some lenders who specialise in prestige vehicles and high balance loans for big spenders as well as some lenders who can help people who have a less than perfect payment history. When your eligibility is being reviewed by 10 lenders instead of one, your chances of securing an approval in principle will probably be higher.

What are the downsides to using a broker?

Unfortunately, finance brokers aren’t right for everyone. There are some downsides to consider before deciding the right way forward for you:

It can take more time to arrange finance via a broker

When you work with a broker, you’re adding another step to the process, which can slow things down. Rather than submitting your paperwork directly to the lender, for example, it’ll pass through your account manager at the broker first. Depending on how fast they act and how smooth the communication is between your broker and lender, you could add hours - or even days - of delays.

Not all lenders work with all brokers

Lenders can be selective about who they work with. If you do decide to apply with a broker, they will only be able to look for deals from the lenders on their panel. This means you might miss out on quotes from lenders who don’t appear on that panel or who don’t work with brokers, potentially restricting your options.

You might be charged an admin fee

Some brokers will charge an admin fee as part of their service. This is typically a relatively small amount (£100 to £300 on average), but it’s worth keeping in mind. When weighing up your options, consider whether this is a fair price to pay for the convenience offered by a broker and potentially unlocking a more competitive deal.

Some brokers may run a hard credit search when you apply

If you’re thinking about shopping around for a finance deal, double-check the checks first (yes, we went there). Most brokers will only run a soft credit check to find out if one they can secure an approval in principle. This won’t affect your credit score or be visible to other lenders. However, if they go straight to the hard credit check stage, proceed with caution. These checks are visible and having too many in a short time could negatively impact your credit score.

Should I go directly to a car dealership instead?

Most car dealers will offer you finance when you choose a car from their forecourt, but that doesn’t mean it’s always the best option for you. While it can be convenient to secure a loan direct from the dealership, it’s important to remember that they are acting as a broker, not a lender.
 
Dealerships will typically work with just one or two lenders, which can limit your options, especially if your circumstances mean you could benefit from a specialist lender. On the other hand, these exclusive relationships mean that dealers sometimes have access to products that lenders wouldn’t offer elsewhere (like limited-time 0% deals on brand-new cars).
 
You may also be able to negotiate on price with the dealer if you get finance through them. There are no guarantees but, as dealers will receive a commission for arranging your finance, they may be willing to dip into their cut to offer a discount on the car’s purchase price.