Direct lenders and loan brokers: what is the difference?

When you borrow money, you can go straight to the firm that will actually lend it, or you can use a credit broker, a firm that takes your details and introduces you to lenders. The distinction matters because the two do different jobs, charge in different ways and leave different traces on your credit file. A direct lender decides your application and lends you the money itself; a broker never lends, it arranges¹.

The rules treat the two roles differently too. Credit brokers must tell you plainly that they are a credit broker and not a lender¹, and a broker can only charge you a fee if it has been explained in writing and you have agreed to it in writing². If you never take out the loan, rules limit how much of the fee the broker can keep¹. And whoever you deal with, the loan itself is always with the lender: you repay the lender, and complaints about the loan go to the lender.

What a direct lender does

A direct lender is the firm that actually lends you the money. A bank, building society or finance company can give you a personal loan whether or not you are already a customer⁵, and the same is true across most of the loan market: payday lenders, home credit firms, credit unions and car finance companies all lend directly. What marks a direct lender out is that it makes the lending decision itself, pays out the money itself, and holds the contract you repay.

Going direct has one clear consequence: you see only that firm's own products. Some well-known lenders only sell through themselves, so a broker cannot get you their deals. In the mortgage market, for example, first direct mortgages are only available from the lender⁶. If you want a loan from a firm like that, applying direct is the only route.

A direct lender must be authorised by the Financial Conduct Authority (FCA); lenders that are not authorised are lending money illegally⁷. Payday lenders, for instance, must be authorised by the FCA, which publishes a list of licensed lenders on the FCA register⁸. An unauthorised lender is a loan shark, the common term for an illegal money lender⁹.

The lender's obligations continue after the money is paid out. It must communicate information to consumers in a way which is "clear, fair and not misleading"¹⁰, and if you fall into arrears on a mortgage, the Mortgage: Conduct of Business Rules say a lender must "deal fairly" with anyone in that position. If things go wrong, you have the right to complain to your lender if it gave you credit irresponsibly and you are now struggling financially as a result¹¹. The guide to how personal borrowing works explains what a lender checks before it lends.

What a loan broker does

A credit broker sits between you and the lender. You give it your details and what you want to borrow, and it searches lenders on your behalf, then introduces you to one or more of them. The broker does not decide whether you get the loan and it does not lend you the money: the lender always does both¹.

Brokers exist because no single lender offers everything. In the mortgage market, online-only brokers let you carry out most of the comparison and application process online, without a branch or office to visit¹², and the scale of what they can reach is large: one free-to-use whole-of-market broker, Habito, says it has access to over 90 lenders with 20,000 products, while another, Better.co.uk, says it has 12,000 products on offer and access to over 100 lenders across the whole market¹². Alexander Hall, a direct mortgage broker, has access to 120 lenders⁶. These are the brokers' own claims about their reach, not a ranking of them.

How brokers are paid varies. Some charge you a fee for their service; others are free to you because lenders pay them commission. In insurance, brokers are paid by commission and their professional opinion can be valuable if your needs are complicated¹³; in mortgages, L&C describes itself as the UK's largest fee-free mortgage broker, meaning it will not charge you for its mortgage advice service¹², while Better.co.uk is free to use but only works with lenders that pay procurement fees¹². Neither model is inherently better value: what matters is the total cost of the loan you end up with, including any fee.

For an agreement in principle on a mortgage, you will either need to approach a mortgage lender directly or go via a mortgage broker¹⁴: both routes to the same outcome exist across most of the borrowing market. Comparison sites sit alongside brokers as a way of seeing several lenders at once, though a comparison site only shows you offers, it does not introduce you in the way a broker does.

Direct lender or broker: how each one handles your application

Whichever route you take, the decision is always the lender's. A direct lender takes your application, runs its checks and decides. A broker takes your details first, may suggest lenders or submit your application to them, but the lender then runs its own checks and makes its own decision¹. This is why a broker cannot guarantee you a loan, and why any firm that promises one before checking anything is a warning sign.

The practical differences are in reach and in who holds your information. Applying direct means one application, one lender's range of products, and your details held by that one firm. Using a broker means your details may be passed to several lenders, and the ombudsman expects brokers to tell you whether your details might be passed to other companies¹⁵. That matters both for your credit file, covered below, and for your privacy.

One point that catches people out: if you are financially linked to someone else, for example as a joint account holder, a lender can have full access to your credit file in the same way it could if it were you applying for credit¹⁶. That applies regardless of whether you applied direct or through a broker, because the check is always run by the lender. If you are worried about a lender's decision, the guide to loan affordability checks explains what lenders must look at before they lend.

Broker fees and charges

This is where the two routes differ most, and where most complaints come from. The Financial Ombudsman Service says the complaints it sees about credit broking are commonly from people who are unhappy about being charged a fee by a credit broker for finding a loan, sometimes charged a fee even without getting a loan, fees not refunded when no loan was taken out or offered, and people misled or not correctly informed about the loan's terms or cost¹⁵.

The rules on what a broker may charge are specific:

• A credit broker can only charge a fee if it has been explained in writing and agreed to in writing².
• If no loan is taken out, rules limit what a credit broker can keep: only a small amount of the fee, so most of anything already paid is returned¹.
• The ombudsman expects a broker to make clear whether it is a broker or lender, its legal name, the fees to pay and when and how, the details of the loan offered, and whether details might be passed to other companies¹⁵.

Not every broker charges you. Some mortgage brokers are fee-free because lenders pay them commission¹², and the same model exists in other loan markets. A fee is not automatically bad value, but it must be disclosed properly, agreed in writing, and largely refunded if no loan results. The narrow guide to credit broker fees and the APR explains how a broker fee affects the cost of credit you are shown.

Credit checks: how each route affects your credit file

Every full application for credit leaves a search on your credit file, and the route you take affects how many searches there may be. Applying direct produces one search, with one lender. Using a broker can produce more, because the broker may pass your application to several lenders, each of which runs its own check.

The reason to care is spelled out plainly by debt guidance: lots of searches on a file can make it harder to take out credit or stop a borrower from getting the cheapest deals⁷. Searches are one of the things other lenders see when someone applies to them next, and a cluster of them in a short period can look like desperation for credit, even when the reality is that one broker shopped the details around.

There are two things worth doing. First, ask a broker before you apply how many lenders it intends to approach and whether it can use quotation or soft searches first, which do not affect your file. Second, keep applications spaced out where you can, and check your credit report yourself before borrowing: the guide to how loans affect your credit file covers what lenders see.

Two related points about credit files and lenders:

• Discussing your options with your lender will not have any impact on your credit file, for example when you contact a lender about payment difficulties while still up to date¹⁷. Under the Mortgage Charter, anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file.
• Giving wrong information to a lender, even accidentally, can cause problems next time you apply for credit, because some lenders use a fraud prevention service called National Hunter, which flags up differences on previous application forms¹¹.

If you already have a poor credit history, the route you choose matters less than which lenders are realistic to approach: getting a loan with a poor credit history sets out the options, including credit unions and community lenders.

Brokers must tell you they are not the lender

The rule at the centre of the broker relationship is disclosure. Credit brokers must tell you that they are a credit broker and not a lender¹. Citizens Advice puts the standard as making it "absolutely clear that they're acting as a credit broker and not a direct lender"². A website that leaves its role vague, or that presents itself as a lender when it passes applications on, is not meeting what is expected of it.

The ombudsman's guidance fills in what clear disclosure looks like in practice. Some of the information it would usually expect the credit broker to provide includes: whether they are a broker or lender, their legal name, the fees to pay and when and how, the details of the loan offered, and whether details might be passed to other companies¹⁵. That list is effectively a checklist you can hold any broker to before you hand over details or agree to anything.

Behind this sits a general standard of communication in the FCA's rules: a lender must communicate information to consumers in a way which is "clear, fair and not misleading"¹⁰. The same principle is applied to brokers when the ombudsman looks at a complaint, and it is one of the things the ombudsman asks about: in credit broking complaints it wants to see how the business made its role and legal name clear¹⁵.

If a broker was not clear about its role, that is not just bad practice, it is the kind of thing that supports a complaint and, where a fee was charged without proper disclosure, a refund. The next section covers how to check what a firm actually is before you get that far.

How to check a lender or broker is authorised

Both lenders and credit brokers must be authorised by the FCA. Lenders must be authorised by the FCA or they are lending money illegally⁷, and licensed moneylenders are regulated by the FCA and must follow their codes of practice¹⁸. If a lender or broker is authorised, it will be on the Financial Services Register⁵. Make sure the broker you use is on the register: this means it is authorised and regulated by the FCA¹.

The checking process is the same whichever the firm is:

1. Search the firm by name on the FCA's Firm Checker or the Financial Services Register⁴.
2. For a lender, select "Borrowing money, including credit card lending and credit information", and check the firm is "Authorised" and has permission to "Lend you money on an unsecured basis"⁴.
3. For a broker, check it is authorised and holds credit broking permissions, and note its legal name, which may differ from the trading name you know it by¹.
4. Use the contact details listed on the register, not the ones given to you, to confirm you are dealing with the real firm³.

The FSCS sets out the same first step for checking any provider: check the provider is authorised by the FCA, then find out whether the particular activity the firm is carrying out is regulated¹⁹. The ombudsman also points to the FCA's Firm Checker as a way to confirm a firm is authorised and help avoid scams²⁰. Whether an online broker or a human one is being considered, the FCA's database can be searched to confirm it is FCA-registered¹².

If a lender is not on the register at all, it is lending illegally and is a loan shark⁹. The page on loan sharks and illegal money lending covers what to do about it.

When a broker or lender gets it wrong: complaints and help

The complaint route is the same whether your problem is with a lender or a broker: talk to the firm first, because it needs the chance to put things right, then make a formal complaint to it, and after its final response, contact the Financial Ombudsman Service if you are still unhappy²¹. The ombudsman is free to use, and you can bring your complaint directly or ask someone to talk to it on your behalf, such as a friend, family member or support worker²².

There are specific rules for complaints that straddle the two roles. Where a credit broker receives a complaint in relation to the subject matter of the scheme, it must forward the complaint to the lender and inform the consumer that it has been forwarded²³. So if you complain to a broker about the loan itself, the broker should pass it on and tell you it has done so²⁴. That does not close off a complaint about the broker's own service, such as a fee or misleading disclosure, which the broker must handle itself.

When the ombudsman looks at a credit broking complaint, the typical information it expects to see includes: a copy of the customer's application, the lenders introduced to, how the business made its role and legal name clear, fee details, compliance with section 155 of the Consumer Credit Act 1974, the work undertaken to find a loan, and whether the customer's details were passed to another company¹⁵. Keeping your own copies of the application, the fee agreement and the broker's messages puts you in a position to answer all of that.

What the ombudsman can do depends on who was at fault:

• If it thinks you have lost money, it will tell the lender to put things right, and may also tell it to pay compensation for distress or inconvenience²⁵.
• Where credit was unfairly provided and you lost out, it typically says the lender should refund the interest and charges you have paid, with interest²⁵. In one case study, a borrower given a payday loan he could not afford wanted the lender to refund the interest and charges, which had increased the cost of his loan²⁶.
• If someone else, such as a broker, made the mistake, the ombudsman cannot restructure the account itself, but it can tell them to pay the money to your mortgage account instead²¹.
• For poor advice, the aim is putting you in the financial position you would have been in with proper advice, which might mean adjusting the capital balance or compensating you for the cost of changing arrangements²⁷.

Consumers who feel they have been given unaffordable credit, or that a lender acted irresponsibly in providing the product, may be able to complain to the Financial Ombudsman Service²⁸. The ombudsman also checks that the lender or broker acted fairly when the problem was reported, even where the original problem was the customer's own mistake, including whether the lender worked constructively with you to set up a reasonable plan²¹. The guides to complaining about a lender and complaining about an unaffordable loan walk through the process, and free, impartial debt help is available from charities such as StepChange and National Debtline if the underlying problem is affording the repayments.