by Aidan Kang, CFA
Senior Writer
UPDATED: December 06, 2022

Direct loans are loans that you can get directly from a bank, government, and other financial organizations. 

As the name suggests, there’s no third party, like a broker, agent, or financial advisor, involved in the loan arrangement.

Only the lender and the borrower are involved.

Since there are only two parties, direct loans have lower interest rates than other types of loans. 

The application process is also faster, with only minimal paperwork required.

Some direct lenders also offer fixed interest rates and repayment plans that are based on your salary, which makes paying back your loan easier.

Compare that to regular loans,  where lenders and banks work with third-parties to secure funds they can lend to their clients.The cost of borrowing is higher because several parties are involved, and each wants to take their cut of the deal

It’s easy to see how direct loans come out on top.

There are different types of direct loans, which we’ll discuss below.

What is a direct payday loan?

Direct payday loans, also called cash advance loans, are short-term loans that usually amount to your next paycheck. You need to return the money you borrowed in 30 days or less, hence the name.

Direct payday loans are considered unsecured personal loans because lenders that offer them don’t require any collateral, and they don’t perform a credit check. 

Generally, you’ll be required to show proof of income, and they’ll let you borrow a portion of what you’ll be paid on your next paycheck.

Since they’re taking on a lot of risks, lenders will charge you with high-interest rates. Not only that, you may be charged high penalty fees if you miss your scheduled repayments.

Payday loans are legal and are now government-regulated. The Consumer Financial Protection Bureau (CFPB) passed rules to protect consumers from predatory lending. 

Under these rules, direct payday lenders are required to assess your capability to pay back the loan and provide written notice before they can collect for your bank account. 

These are only a couple of the rules that were proposed in 2016 and then fully implemented last June 13, 2022.

What is a direct installment loan?

A direct installment loan is a loan arrangement wherein you borrow a predetermined amount of cash and pay it back in monthly installments. 

You’ll make equal payments every month, which include the principal loan and the fixed interest rate. It’s a good option if you’re looking for a loan that you can pay off in a manageable amount per month.  

There are different types of installment loans and the most common ones are personal loans, no-credit-check loans, and auto loans.

Personal loans

Credit unions, private lenders, and online direct lenders offer personal loans. You can borrow a certain amount, which is disbursed in a lump sum, and pay it back in monthly installments over an agreed-upon duration and interest rate.

Personal loans are best for home improvement projects, car repairs, and other expenses. The repayment terms range from 24 months to as high as 72 months. 

Although its interest rate is fixed, it may still be higher than the rate offered by credit card companies.

No-credit-check loans

No-credit-check loans, as the name implies, don’t require a credit check. Direct lenders offer this type of loan to those who need emergency cash. 

Unlike other types of loans, a no-credit-check loan amounts to no more than $500.

These short-term loans come with high-interest rates since the lender takes on a lot of risks because they don’t know whether you have good or bad credit standing. 

Once you’ve been approved for a loan, you have to issue a postdated check for the amount you borrowed, interest rate, and other fees. The lender will cash out your check on your next payday.

Auto loan

An auto loan is a type of loan that you get if you want to buy a car but can’t afford to pay the total amount in full. All you need to do is cover the down payment and pay the balance with a car loan.

Then, you need to make fixed monthly payments. You shouldn’t default on your payments because if you do, the lender can repossess your vehicle.

What is a direct mortgage loan?

Direct mortgage loans are loans you can borrow directly from a lender or an investor. The loan arrangement requires collateral, which is the physical property that’s supported by the loan. 

If you fail to pay the direct mortgage loan, the lender can seize the property that’s backing the loan so they can recoup their investment.

Direct mortgage loans have a term of between 10 and 30 years. You can negotiate the terms of the loan directly with the lender.

The most common examples of direct mortgage lenders are portfolio lenders and mortgage banks. 

You need to have a good credit score, cover the required down payment, and file the loan application.

What is a direct student loan?

The most common direct student loan is the federal direct loan, which the U.S. Department of Education issues.

There are four types of Federal student loans:

1. Direct subsidized loans – the government covers the interest rates of your student loans when you’re in college and six months after you graduate. Only undergraduates are allowed to apply, and they need to demonstrate financial need.

2. Direct unsubsidized loans – offered to undergraduate, graduate, and professional students regardless of their financial needs. Unlike the direct subsidized loan, you will be responsible for paying the interest rate.

3. Direct PLUS loans – offered to graduate and professional students. However, if you’re an undergraduate, your parents may apply for you.

4. Direct consolidation loans – lets you combine all eligible federal student loans into one loan from one lender. The interest rate for the consolidated loan will be the average of all the interest rates of the federal student loans that were consolidated.

Private lenders also offer direct student loans. However, they don’t have consolidation programs. The amount you can borrow on a direct student loan will depend on the school’s cost of attendance.

How to find a direct lender

We would only suggest getting a loan if you’ve done your calculations and are certain that you can make the repayments. Once you’re sure, we’d suggest starting your direct lender search with these lenders: 

  • Marcus for debt consolidation
  • Regions Banks for secured loans
  • SoFi if you’re interested in other perks aside from a personal loan
  • Pnc for small loans that range from $1,000 to $35,000
  • LightStream for your home improvement

As always, shopping for a loan between lenders and negotiating a good rate is key to getting a good deal.

Here are some more steps to help you identify a good  direct lender:

  • Assess your current financial situation so you know if you have a chance of qualifying for a loan or not. Some lenders prefer applicants with high credit scores, while others cater to people even with low credit.
  • Explore all of your options. Check with online lenders, credit unions, banks, and other financial institutions that offer direct loans.
  • Ask your friends, family, or colleagues for referrals. It’s better to do business with direct lenders that are tried and tested by people you trust.
  • Shop around because loan terms and interest rates vary from one lender to another. It will help you find the best and most affordable borrowing option that’s suitable for your needs.
  • Consider factors other than interest rates. These include the repayment timeline, penalties, and other fees.

It’s important to review their terms and conditions and repayments before you sign up. You must understand the payment terms and ensure that you’ll be able to pay them on time.

Some companies charge you late penalties, which can be very high. This is usually buried in their fine print. So take your time to read through your lending document carefully before you sign. 

How to apply for a direct loan

The application process for a direct loan is relatively easy and quite similar to traditional loans, although the requirements may vary by lender. 

Generally, you have to fill out an application form and show proof of income.

You need to indicate how much you would like to borrow. In some cases, the approval process takes a matter of minutes or a few days. 

Once you’re approved, you will get your money in a lump sum into your personal bank account.

Once you get the fund, you’re expected to repay the loan on the dates you’ve agreed on with your lender.

What are the benefits of working with a direct lender?

Taking out a loan from a direct lender has several benefits:

Direct transaction with the lender

As mentioned, applying for a loan with direct lenders means no third party or middleman is involved. 

The lender will process your application and release the money you need if you’re approved. You’ll also make repayments directly to the lender.

Better interest rates and loan terms

Direct lenders offer better loan terms and better interest rates compared to other lenders that work with a middleman or third-party group. 

In most cases, they will only check your basic information and not perform a credit check, which could mean better rates for your loan.

Unlike traditional lenders, direct lenders aren’t bound by restrictive conditions and terms for their offered loans. Direct lenders can offer customized loans to meet your needs and personal circumstances.

Fast loan approval

As direct lenders take care of the entire process, approval is usually faster. Once they receive your application, they will evaluate and approve the loan based on their criteria. 

They don’t have to wait for a third party to check your application, which means your loan will be processed immediately and your money released as fast as possible.

What disadvantages of working with a direct lender?

Like other loan providers, there are disadvantages to applying for a loan with direct lenders.

Shopping around takes time

Shopping around for reputable loan providers takes time, which could be a hassle on your end if you have a busy schedule.

You have to do your research well if you want to find the best direct lender for your needs. You need to vet and ensure that the lender has a good reputation. 

Comparing rates can be complicated

Direct lenders offer different loan terms and interest rates. Finding a lender that best fits your needs can be complicated because you’ll have to compare their numbers.

Submitting individual applications

Since there’s no third-party involved, no one can help you submit your applications. As you probably know by now, there are sites that offer to help you find a lender. All you need to do is complete an application, and they’ll submit it to different lenders to find you a match.

With direct loans, you need to submit individual applications by yourself and gather all the necessary documents, which could be a daunting task.

Wrapping up

Direct lender loans are great options if you’re looking for short-term loans for emergency purposes. Most of them don’t require you to have a good to excellent credit score or provide collateral. You’ll be dealing directly with the lender throughout the entire duration of your loan.

You can borrow personal loans, payday loans, auto loans, mortgage loans, and student loans from direct lenders.

Direct lenders offer flexible loan terms and lower interest rates than others that use third parties. However, direct lenders aren’t as tightly regulated as traditional lenders. Having said that, you need to do your due diligence and carefully check and compare loan terms and interest rates to make sure that you’ll choose a reputable, established, and trustworthy direct lender.