How to Weigh the Pros and Cons of Online Loans7 min read
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Whether you use a budget-tracking app or deposit checks to your bank account through your phone, chances are you’ve moved at least some of your financial life online. So if you’re looking to borrow money, you might wonder: Should you consider online loan lenders?
Online loans can be a good way of securing needed cash. But before you act, here are some pros and cons of online loans, as well as tips on securing a loan via the internet.
Pros and cons of online loans
Online personal loans may be taken out for a number of reasons, including consolidating debt, making home improvements, paying for a special event like a wedding, financing a car, paying for adoption or medical expenses, and funding a business. You also might take out an online loan to pay for school (Commonbond is one online lender with a key focus on student loans). If you’re thinking about getting an online loan, consider these pros and cons first.
Pros of online loans
Here are some of the upsides of going online to get a loan — some of them obvious and some less so:
1. Convenience 2. Potentially low interest rates and fees 3. Instant rate quotes 4. Fast turnaround time 5. User-friendly websites 6. Small loan amounts
Rather than having to go into a bank and talk to a loan officer in person, you can secure an online loan from the comfort of your own home. The process can be fast, but if you need to, you can often start an application online, save your updates and go back to the online form later.
Increasingly, brick-and-mortar banks also offer the chance to fill out personal loan applications online. However, you generally have to be an existing customer when it comes to getting a personal loan with a traditional bank or credit union, which puts a dent in the convenience factor. Online personal loans are also typically unsecured (although there are some that are secured), so you don’t need to have collateral — such as a checking account at a bank, for instance.
Additionally, there are many options for personal loans with online lenders, while many traditional banks — such as Bank of America, Capital One and Chase Bank — don’t even offer such loans.
2. Potentially low interest rates and fees
You may find favorable interest rates and low or no origination fees for online loans, although your rates typically depend on your creditworthiness and overall financial profile. For example, online lender LightStream has no fees and currently has an APR range of to . Meanwhile, a Citibank personal loan starts with a higher APR of to .
However, you can only get that super low rate with LightStream if you have the most impressive credit and payment histories, along with a stable income and savings. That rate also only applies to certain loan amounts and terms.
Here you can read our review of some of the best personal loans for good credit. If your credit and financial profile aren’t the strongest, you might consider a lender that allows cosigners or joint borrowers.
3. Instant rate quotes
Many online loan companies offer the option of instant preapproval. By entering a few basic pieces of information, you can see whether you prequalify for a loan.
This means you’ll get a sense of your rates and terms without having to fill out a full application. Plus, your credit score won’t be impacted, because the companies will perform a soft credit check during the preapproval process. As a result, you can compare loan offers from multiple online lenders easily without hurting your score. There will typically be a hard credit check once you actually apply for the loan.
4. Fast turnaround time
Online loans can have a very quick turnaround time, which comes in handy if you need fast funds.
Personal loan lender ELoan, for example, may deposit money into your account as fast as the next business day once your application is approved, and RocketLoans may allow for same-day funding if you are requesting $25,000 or less.
5. User-friendly websites
Online loan companies prioritize user experience because they work solely on the web, with no brick-and-mortar services. Therefore, they tend to have easy-to-use, well-designed websites. They also are typically upfront with information, such as how much you can borrow and the range of APRs you can expect.
Online lenders also often have a robust FAQ section on their websites, so if you have questions about borrowing, you should be able to find answers pretty easily.
6. Small loan amounts
It isn’t always easy to get a really small loan from a traditional bank. For example, the lowest personal loan you can get from Citizens Bank is . Some online lenders have similar ranges. However, others, such as online lender Upstart, offer loans as small as .
You might also look for small-dollar loans from a credit union, but remember that you typically have to already have an account to secure a loan.
Potential cons of online loans
Although online loans can be a great option for many borrowers, they also can come with some potential downsides. Watch out for these drawbacks before you apply.
1. Security concerns 2. Lack of loyalty discounts 3. No face-to-face customer service
1. Security concerns
Providing personal information through your computer can be risky, so you should always make sure you are working with a reputable business before applying for a loan online.
Besides facing hacking risks, some online companies also have been targeted by scammers. ELoan, for example, warns that scammers claiming to be ELoan representatives have made unsolicited calls to customers.
If you’re borrowing from an online company, do so only from its official website. Be wary if you get an unsolicited call seeking your personal information, as it could be a scammer and not a person affiliated with the lender. And always be extra careful to ensure you are not working with a predatory lender.
2. Lack of loyalty discounts
Some banks offer interest rate discounts or special rewards programs connected to your loans if you’re a banking customer.
However, online lenders typically don’t have such relationship discounts, as most borrowers don’t have an existing account with the lender. If you aim to find your lowest possible interest rate, it could be worth checking with your current bank or credit union to see what it can offer you.
It should be noted that while loyalty programs may not be common with online lenders, they may offer perks such as a lower interest rate on your loan for enrolling in an autopay program.
3. No face-to-face customer service
If you go with an online loan, you give up the option of visiting a brick-and-mortar location and speaking in person with a customer service representative.
With an online loan company, you likely will be able to speak to a representative over the phone or via email. But if you don’t actually love doing everything online, and having face-to-face interaction is important to you, you might want to opt for a bank or credit union.
Tips on getting an online loan
Should you consider a loan from an online lender? Sure, but you should consider different types of lenders before you decide.
Your bank might offer a good deal if you’ve been a customer for a long time. And some of the best credit unions have a reputation for flexibility and working with borrowers who don’t have strong credit scores.
So even though it’s easy to hop on your computer and apply with an online lender, it could be worth taking the time to explore offers from banks and credit unions.
If you do decide to take out an online loan, take these steps:
Understand your credit: You might want to check your credit before you even go through the preapproval process, just so you know what to expect regarding the terms you’ll be offered. You can request your free credit report from all three major credit bureaus on an annual basis at AnnualCreditReport.com. If you see anything in the reports you think might be incorrect, you can contact the bureaus and attempt to correct these errors. You may also get an idea of your credit score for free through your own bank, through Discover (even if you don’t have an account with them) or through sites such as our parent company, LendingTree, which provides your VantageScore. Prepare all your documentation: Gather up all the documentation you’ll need to provide the information necessary to finalize the loan, including proof of income, employment history and other debt you might be carrying. If you have all of your information and documents on hand before you start the actual process online, it’ll be easier to manage. Research lenders and compare quotes: As noted, there are lots of options out there for online loans, and you don’t want to just go with the first online lender you hear about. Before deciding on a loan, you should look into the rates, terms and potential perks of several online lenders, and find the one that is best for you and your situation. You can go to Student Loan Hero’s personal loan marketplace to compare and contrast our vetted list of preferred lenders.
Rebecca Stropoli contributed to this report
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