The Difference Between 1st, 2nd and 3rd Tier Lenders

The first lending tier has to do with basic trade credit. As the second lending tier has to do with a more advanced trade credit it is important to understand the difference and terms used by lenders. The third tier of lending has to do with bank lending. We all have been into a bank or a similar financial institution and know how these companies work.

The ROI charged by them is always in sync with the Libor rate of interest or the Prime rate of interest. The rate of interest charged includes a flat quote rate plus a factor that can be maximum 4%. Thus the final rate of interest would be “x + 4%” where “x” is the prime rate.

Interest rates depend on the lender. An interest rate means that the rate at which the interest is paid by a borrower for the use of money that they borrowed. A very good example would be that if a small company borrows capital from a bank to buy new asset(s) for their business, in return the lender receives interest at a predetermined interest rate for the use of their funds and instead lending it to the borrower. Interest rates are usually a percentage of what the lender will earning over the period of a year. It is important to know what your interest rate is and know what it means.

Now, 2nd tier lenders would be any company or financial institution that does not come under any regulatory agency. These companies are bound by the state they are in and their banking laws. These companies are free to offer business loans to companies but cannot offer any consumer loans. For taking such loans the company’s have to either submit a collateral or personal guarantee. The personal guarantee of any owner submitted in such cases should be higher than 20% of the total stock. The interest rate is same as the prime rate but the factor that is added would be higher than what a 1st tier lender would charge as they have additional costs for running the business and this gets added to the prime rate while deciding the final rate of interest.

Lenders that are in the “3rd tier” are individuals who loan out money to individuals. They are not under any regulatory agencies and their rate of interest is usually the highest. They tend to show particular interest in a particular type of collateral or industry. In the current economy the 2nd tier lenders are having a huge consumer base as the 1st tier lenders are generally the ones who make the loans and the 2nd tier lenders are the ones who are actually lending money and giving loans.

Source by Lexe Charleston

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