Online loans are convenient and may have more lenient lending requirements than traditional lenders.
Always research a lender thoroughly before you submit personal information online.
Historically, people had to go to their banks or credit unions, in person, to get any type of loan. This is no longer the case as many lenders and financial institutions have moved online. Now you can get everything from a $300 loan to a home mortgage on the internet.
The ability to secure a loan online has made it easier for many people to get money in a pinch, but not all online loans are created equal. For one, sometimes it’s difficult to identify scams when you’re working with an online-only lender that you’re unfamiliar with. Here are some things to consider and a guide to the process of applying for an online loan.
In this article:
What is an online loan?
An online loan is one that you get from any lender that operates online. That means you could get an online loan from a traditional lender, whether you work with a bank or credit union, as well as from online-only lenders.
Online-only lenders don’t have a physical location you can visit and they allow you to complete the whole application process online. Some banks and credit unions allow you to start an application online, but then require you to finish the process at a branch location. This is something to keep in mind as you shop around for loans.
There is nothing inherently better or worse about getting a loan online vs. in person. You can get the same types of loans: payday loans, installment loans with or without a co-signer, lines of credit, and larger larger loans like mortgages.
Pros of online loans
There are a few reasons you may want to get a loan online instead of from a lender with physical locations. Some advantages of online loans are
It’s easy to compare rates
Online-only lenders may have more lenient credit requirements
The major advantage of an online loan is the convenience. You can apply without having to worry about going to a physical location within business hours. Online applications are also quick. You can apply, get approved in minutes, and then have money in your bank account within 24 or 48 hours.
Because you have the power of the internet at your fingertips, it’s also easy to shop around and compare loan offers right as you get them. Many lenders allow you to get estimate rates without having to actually apply. This helps protect your credit score because the lender isn’t making a hard inquiry, also called a hard pull, on your credit report. Hard inquiries occur when you apply for credit and they show up on your credit report.
You can also find online lenders that are more lenient with whom they loan to. That means if you don’t have a good credit score or if you don’t have much credit history, you can still get a loan. Of course this leniency can make it harder to identify legitimate lenders. It may also lead you to take on a larger loan than you can comfortably afford.
Cons of online loans
Some potential disadvantages of online loans are
Higher rates and perhaps higher minimums
A greater number of unsafe lenders
You may pay for the convenience of online loans in the form of higher interest rates. In the case of short-term payday loans, you may have to pay an interest rate of 400% or more. You may also have a difficult time finding online loans for amounts of less than $300.
The other major concern, especially with an online-only lender, is that they are not a legitimate lender. Always research a lender before you submit personal information. Check reviews and resources like the Better Business Bureau and the Federal Trade Commission, which provides advice on how to spot and avoid online loan scams.
How to shop for a loan online
If you’re looking for a loan, a good first step is to make sure you actually need one. Since rates on all short-term loans are high, you don’t want to take out a loan if it isn’t necessary.
Assuming you need a loan, start at your bank or credit union. Many allow you to at least start a loan application online. If you’ve been a customer somewhere for years, they may be willing to offer you lower rates. And don’t be afraid to negotiate for a better rate. Yes, some rates are already set, but no one wants to lose business from a loyal customer.
Online lenders often provide their rate ranges on their websites. Those ranges can give you an idea of what to expect. In some states, law dictates the rates a lender can charge. In other states, rules are lax and you can really help yourself by shopping around first.
If you find a lender with reasonable rates, get a loan estimate. This is a free estimate of the rate a lender expects you to receive if you formally apply for a loan of the amount you specify. When you ask for an estimate, a lender will also tell you if you aren’t eligible for a loan.
Information you need for loan estimates
In order to get a loan estimate, you will likely need to provide the following information:
Social Security number
The loan amount you want
Again, research a lender thoroughly before you provide any personal information online. Just a little bit of due diligence can save you enormous headaches in the future. If you are afraid that your information has been compromised, here are some ways to tell if your identity has been stolen.
Common online lenders
The loan rates you get will vary by lender and according to your personal situation. Just for the sake of getting you started, here are some popular online lenders:
Marcus by Goldman Sachs
How to apply for a loan online
To apply for a loan, you will first need to see if you’re eligible for the loan. This is usually the same process as requesting a loan estimate and requires you to fill out a personal information form. You will provide your name, address, contact information, Social Security number, the loan amount, and your income.
The lender will then do a credit check and potentially another background check to decide if they are willing to lend to you. With an online lender, checking your eligibility usually takes less than one or two minutes.
If you’re approved it means the lender is willing to give you a loan. They will also tell you the loan amount and rate for which you have been approved. You will need to fill out another form to formally accept the offer. This formal application is where you provide information about where to send the loan money (e.g. your checking account). Depending on the type of loan, you also need to provide payment information. For example, a payday loan may automatically debit your account on a certain date.
What if your application is denied?
First of all, don’t give up. It happens and it doesn’t mean that you won’t be able to get a loan somewhere else.
Next, try to understand why you were denied. If it’s because of your credit history, remember that some lenders have more lenient lending requirements. Look around a bit more and request more estimates. Sometimes a denial happens because of incorrect information the lender found during a background check. Calling the lender to clarify information is enough to change the result in some cases.
Getting denied by a lender can also hurt your chances of getting a loan from another lender, so don’t apply to loans that you think you have little chance of getting.
Another option if you have poor credit is finding a co-signer. Having someone with a better credit history co-sign on your loan may be enough for a lender to reconsider. Just make sure your co-signer can afford the loan too. They will be responsible for it if something happens to you.