Direct Loan

A direct loan is a loan made directly from a lender to a borrower, rather than through a third party.

What is a Direct Loan?

A direct loan is a type of loan in which an institution lends directly to a borrower. Direct lenders include nonbank institutions, such as the government, as well as banks. Wells Fargo, Washington Mutual, and Bank of America are examples of banks that provide direct loans.1 Smaller banks may offer them as well, but are more likely to go through third-party lenders with greater resources.

What are the advantages of Direct Loans?

Because direct loans cut out the middleman, they are typically less expensive than other loans. They also may be faster,2 and sometimes come with perks such as fixed interest rates and income-driven repayment plans.3 Student direct loans, in particular, offer other benefits over private lenders.

What are the different types of Direct Loans?

The term “direct loan” is most commonly used in reference to student loans and home purchases. However, it can be used to refer to any type of direct loan, including direct payday loans.

What are Direct Payday Loans?

Direct payday loans are payday loans that are offered directly by the lender. They contrast with loans provided through third-party brokers who act as go-betweens—they connect people who want to borrower money to lenders willing to loan to them. Potential borrowers provide their financial information to the broker who then passes it on to lenders interested in fulfilling their loan request.

Are Direct Payday Loans good or bad?

Direct payday loans are bad for all the reasons that payday loans themselves are bad. They typically target borrowers with bad credit and charge astronomical interest rates and fees. Unlike installment loans, they come with unrealistic repayment terms that require borrowers to pay them off in as little as a week. Lenders often tout payday loans as “no credit check loans” because they don’t check the credit history of potential borrowers. However, they do this because they get to charge extra interest and fees if borrowers miss their payments. Payday lenders benefit when borrowers don’t make payments on time, and direct payday loans—just like any kind of payday loan—are notorious for trapping borrowers in a cycle of debt.

What are Federal Direct Student Loans?

One common type of direct student loan is provided through the federal government. These loans help pay for higher education and to participate, a student must be enrolled in school at least half-time. These loans are also known as “Stafford loans,” and the amount and type of loan (subsidized, unsubsidized, etc.) are determined by the student’s school.4 The government limits the amount it provides, however, with loans capped at $31,000 for dependent students and $57,500 for independent students. Graduate students can receive up to $138,500.4

The government offers four types of direct student loans:

Direct subsidized loans are available to students who demonstrate financial need. The U.S. Department of Education pays the interest on the loan while the student is in school and for six months after a student has left.

Direct unsubsidized loans are available to students regardless of financial need. The terms are not as good as subsidized loans and the student is responsible for paying the loan’s interest at all times.

Direct consolidation loans let students combine multiple federal student loans into a single monthly payment. This simplifies the repayment process and can give students up to 30 years to pay off their loans. However, taking more time to pay off a loan means that a student will make more payments and pay more interest.

Direct PLUS loans are offered to graduate and professional students. They are also available for people who are pursuing college or trade school and are parents of dependent undergraduate students. To be eligible, a borrower must not have a poor credit history.

Where do I pay my Federal Direct Student Loan?

Students pay their direct loans through their loan servicer. Loan servicers are responsible for handling billing, and each one has its own payment process. Students can find their loan servicer by logging into the Department of Education’s website, and they can make payments by visiting the loan servicer’s website. The Department of Education provides a list of loan servicers to select from.

Are Federal Direct Student Loans eligible for PSLF?

The Public Service Loan Forgiveness (PSLF) program waives the balance on student loans for people who work for government organizations or nonprofits. To qualify, a borrower must have made 120 qualifying monthly payments under a qualifying repayment plan while working for a qualifying employer.

Any loan received under the William D. Ford Federal Direct Loan Program is eligible for PSLF if the borrower meets the necessary requirements. Loans that are not eligible for PSLF are Federal Family Education Loans (FFEL) and Federal Perkins Loans.5

What are Direct Mortgage Loans?

With housing, direct mortgage lenders are differentiated from correspondent lenders, who approve a loan and sell it to a lender who funds it. Direct lenders are also sometimes contrasted with mortgage brokers, who function as intermediaries between borrowers and lenders. A list of direct and indirect mortgage lenders is available through Consumer Affairs.

References:

  1. “Types of Mortgage Lenders.” The Truth About Mortgage. Accessed on October 11, 2016, at http://www.thetruthaboutmortgage.com/types-of-mortgage-lenders/.

  2. “Which Type of Lender is Right for You?” Bankrate. Accessed on October 11, 2016, at http://www.bankrate.com/finance/mortgages/which-type-of-lender-is-right-for-you–1.aspx.

  3. U.S. Department of Education. Federal Versus Private Loans. Retrieved from https://studentaid.ed.gov/sa/types/loans/federal-vs-private.

  4. U.S. Department of Education. How Much Can I Borrow? Retrieved from https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#how-much.

  5. U.S. Department of Education. Public Service Loan Forgiveness. Retrieved from https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/public-service#eligible-loans.