Deciding which type of credit is best for you, involves many factors, such as how much money you need, how soon you need it, what terms are available, and which lenders you can trust (and which you should avoid). Shopping for a personal loan online can help simplify your search.
Advantages of online personal loans
Shopping for personal loans in your pajamas is not only more comfortable, it can also save you money and time. Here are four advantages of shopping for a personal loan online.
Easy comparison of rates
One of the biggest advantages to shopping online for a personal loan is the fact that it allows you to search from a nationwide pool of lenders. This can be a huge time saver, and you can even use advanced search tools that will allow you to filter loans by type, rate and terms. Even if you decide to go with your local bank or credit union, you can often find discounts offered to those who apply online.
Traditional lenders may take days or even weeks to assess the merits of a loan request. Online lenders, on the other hand, have specially designed software that analyzes the risk factors of potential borrowers, checks their information and provides a decision quickly, sometimes within just minutes.
Brick-and-mortar lending companies are not only slow to evaluate your application, but they can also tend to take their time getting the money to you once you’ve been approved. Online operations are designed to expedite these transactions, and will generally give you access to your funds quicker, often the same day.
Lower minimum amounts
When compared to traditional brick-and-mortar institutions, online companies have lower operating costs by nature. This significant savings to their bottom line allows them to offer better rates and smaller personal loans, which have a narrower profit margin.
Disadvantages of online personal loans
Despite the many benefits of online lending, there are some disadvantages you should consider as well.
Online lending cannot provide the same personal touch of being able to visit your local bank or credit union and have a friendly chat with your favorite banker. With online lenders, you can ask questions by email, in a chat room or over the phone, but you will probably deal with a different representative every time you contact them.
One major reason that online lenders are able to reduce their costs is because they are able to substitute people with banking software that can assess risk and manage loan portfolios. Because of this, another related drawback is that when you secure a loan online, you are not dealing with one specific person who would then be responsible for managing your loan. This is not a problem when everything is going well, but if any issues arise with your loan, you can’t just go down to your local branch to talk to the banker who sold you the loan.
Scam artists come in all shapes and sizes, and can be found in large, “reputable” banks as well as with smaller lenders. It is, of course, much easier and cheaper to setup a professional looking website than an actual brick-and-mortar operation, making the risk of being caught up in a scam much higher when you use an online organization.
Traditional lenders undergo a lot of scrutiny from local authorities and have to apply for permits and licenses to start operating their business. Online lenders also have to follow state and federal regulations, but it’s easier to sidestep them and create a fraudulent company if it operates exclusively online.
Savvy online criminals can also create clone websites that look just like the website of an established financial institution, and can trick you into providing them with confidential or sensitive information. This doesn’t mean you should avoid online lending, just that you have to be extra careful when choosing an online lender.
How to choose an online personal loan lender
Online lending is a competitive business. Finding an online lender won’t be a challenge, but sorting through the numerous banks, credit unions, private lenders and loan brokers eager to do business with you won’t be easy. The following recommendations can help you filter through the multitude of available online lenders.
Ask for references
Talk with people you trust and ask them who they have used in the past and who they recommend. Start with professionals who are knowledgeable in financial matters, such as accountants, lawyers, and financial advisers. Of course, be skeptical about the advice you receive from people who receive a commission from the financial products they recommend.
Make sure the online lender you plan to do business with is a state regulated organization. The Conference of State Bank Supervisors has an up-to-date directory with information on all State Banking Departments.
Experience is valuable
Although you can’t expect online lenders to have hundred-year long legacies like Wells Fargo or Chase, it’s still a good idea to go with a lender who is somewhat well established and has experience so you can avoid any fly-by-night operations. Give preference to companies with a long track record because they have a reputation to protect and are more likely to pay attention to the quality of their customer service.
Check their contact details
Although online lenders don’t need brick-and-mortar branches like traditional lenders, they still need offices. Avoid dealing with small time lenders who work from their basements. You can check out the address of a lender online from their contact details. If it appears to be located in a residential area or a particularly shady neighborhood, you may want to consider looking elsewhere.
Read the loan agreement carefully
While a good reputation, proven experience, and a legitimate business address are important, nothing substitutes the importance of reading the loan agreement in its entirety, paying special attention to the fine print. Take the time to ensure you fully understand what you are getting into. Check for hidden charges like “application fees”, “membership fees”, or “pre-payment penalties”, none of which are included when calculating the APR of a loan.
Types of personal loans
Although there are only two main types of personal loans – secured or unsecured – there are many sub-categories to choose from. Each has its own strengths and weaknesses, and determining which one is best for you will depend on your individual financial circumstances and goals.
Secured loans generally offer lower interest rates and better terms, but require you to put up something of value as collateral, such as a home mortgage or a car title loan. One huge downside to this is that if you’re late with your payment, even if only by one day, you have technically defaulted on your loan and the lender has the right to repossess the security listed.
Pawn Shop loans are also a special type of secured loan. When you pawn an item, the principal of the loan is generally a small fraction of the value of the property pawned and the security remains in the possession of the lender until the loan is paid in full.
Unsecured loans don’t require collateral, so if for some reason you are unable to make your payments on time, you don’t risk the chance of losing your property. The trade-off however, is that interest rates and fees are usually higher and you may have a harder time getting approved.
Credit Cards are perhaps the most popular form of unsecured loans, and provide a flexible method of financing a purchase. Credit cards are attractive to many consumers because they are easy to obtain and they provide instant access to credit. (Check out our top credit card reviews.)
One problem you may encounter however, is that they usually require a fair to good credit history in order to get approved. Interest rates and late payment fees can be high as well, and the payment schedule can also fluctuate, making it easy to rack up huge amounts of debt if you only make minimum payments.
Small band and credit union loans
Small loans from a bank or credit union provide the lowest interest rates among unsecured loans, generally between 10% and 12%. However, they usually require consumers to have decent credit and provide proof of income or the possession of assets that are worth at least the amount of the loan.
If your credit is not good enough to qualify on its own, you may qualify with a co-signer added to the account. If you have a friend or relative with good credit who is willing to co-sign for you, many banks and credit unions may approve your loan despite your personal bad credit history.
Payday Loans are usually smaller, short-term loans with high interest rates and fees that require the repayment of the entire sum after only two weeks. If borrowers cannot afford to repay the entire amount, they can extend the loan by paying additional fees. Instead of relying on their clients’ credit history, payday lenders use employment records as proof of ability to repay these loans. Qualifying for a payday loan is easy and cash is deposited directly into your account. (Check out top personal loan lender reviews here.)
However, according to a report by the Pew Charitable Trusts, payday borrowers end up indebted for five months or longer on average, just trying to pay off that initial two-week loan. These borrowers can end up paying more than $500 in finance charges for a $375 loan.
Direct-deposit advances are similar to payday loans, and are offered by more reputable financial institutions. These loans have some advantages, but the short repayment periods and high interest and fees associated with these loans still drive the interest rates on these advances into the three digit range.
Peer-to-Peer loans are unsecured personal loans between unrelated individuals. Borrowers and lenders are connected online by peer-to-peer platforms that match them by level of risk and loan terms. These websites use automated risk assessment software, which keeps overhead low and interest rates competitive.
However, lenders usually require borrowers to have fair to good credit (between 640 and 660) to qualify for a loan. Additionally, lenders who invest in peer-to-peer loans are not protected by the same government oversight that other options provide.
Caveat emptor is a Latin phrase meaning “let the buyer beware,” and is a fitting warning for anybody looking to secure a personal loan. It is an ancient legal term that places the responsibility of examining the terms of a sale or service roundly on the buyer. This may be unfair, but in a business like unsecured lending, which can attract unsavory characters, it pays to be alert.
Even when dealing with honest and reputable operators, it’s worth it to keep an eye out for some common down sides and cleverly labeled additional fees and penalties.
This may seem a little counter-intuitive, but commercial lenders don’t generally want you to pay your debt early. When they calculate the cost of selling a loan, they assume you’ll continue paying interest until a certain date. If you pay too soon, you reduce their profit.
Some lenders avoid this loss of profit by charging a prepayment penalty to borrowers who pay off their debt early. You can avoid this charge by looking in advance at the fine print.
Lenders often try to keep their APR low and competitive, while boosting their profits, by piling on fees that are not always obvious to the consumer. These additional fees do not get included in the calculation of the APR, and can include “closing fees”, “loan service fees”, “establishment fees” and many others. Always include these fees into the overall cost when comparing loans.\
Online lending is no longer a novelty. The most traditional banks and financial institutions are now benefiting from the lower costs and higher efficiency of doing business online.
Shopping for a personal loan online offers important advantages, such as a wider selection of lenders, faster approval and immediate access to cash. As long as you learn how to avoid the pitfalls inherent to doing business online, there are a lot to benefits from using online personal loans.