Pros and Cons of Online Lenders
The main benefits of online loans are their convenience and speed. Online lenders often offer quick applications, fast approval and funding sent straight to your bank account. Whether you want to consolidate high-interest debt or take care of an emergency expense — online borrowing may be able to help.
However, there are a few things you should know before clicking apply. Here are some of the pros and cons of online lenders and how they compare to traditional lenders.
| Online Lenders | Traditional Lenders | |
| Lenders | Non-bank lenders with no physical branches. | Banks and credit unions. |
| Application | Fully online experience, optimized for speed and ease. | Apply in person. Some lenders may also offer online applications. |
| Funding | You’ll typically receive funds fast, even as soon as the same day or next business day. | Approval and funding may take longer depending on the lender. |
| Interest Rates | May have higher interest rates, especially lenders who work with those with bad credit. | May offer more competitive rates but can have strict eligibility requirements. |
| Terms | Varies by lender — anywhere from a few months to a few years. | Varies by lender but you may be able to find longer loan terms. |
What are online personal loans?
An online personal loan is a type of loan you can get through an online lending platform. Online lenders are different from traditional banks and credit unions — they don’t offer banking services, they don’t have physical branches and they typically specialize in financial products like installment loans, lines of credit, debt consolidation loans and even credit cards. Generally, personal loans from an online loan provider give borrowers an upfront lump sum of cash that you can repay over time.
The entire process for online loans — application, loan approval and funding — happens online. Eliminating the need for in-person visits to brick-and-mortar banks or credit unions.
Pros of Online Loans
Easier to apply. Online lenders generally have a streamlined online application process — making it easier and more convenient than travelling to the local bank to fill out an application. While many traditional lenders have online capabilities, online lenders optimize their loan applications for the speed and ease in an online environment.
Faster funds. In urgent financial situations, it could be critical to receive funds quickly. Usually, online lenders offer faster approval and funding than traditional banks. You can get funds in your bank account within a few hours or business days (depending on your lender and loan type).
Easier to compare offers. Using online platforms can make it easy to compare interest rates, repayment terms and other conditions side by side. This can empower you to make an informed decision and find the best loan for your financial needs.
Additionally, many online lenders allow you to seek preapproval or prequalification. Once you enter some basic personal and financial information, certain lenders make a soft credit inquiry — also called a soft credit check — which doesn’t impact your credit score. If you prequalify, you can get a sense of the loan amount, rates and terms you may be eligible for. Be sure to confirm that the lender uses a soft credit check, rather than a hard check, which could affect your FICO® score.
Many options. Since you’re not limited to lenders with locations nearby, online loans can offer a broader range of lender options. Online lenders are sometimes more willing to consider a wide range of credit histories. If you have bad credit, you may find a greater likelihood of approval with online loans.
Cons of Online Loans
No in-person service. One of the downsides of online loans is the absence of face-to-face interaction. Online lenders, however, may offer chat, email and over-the-phone customer support.
Typically higher rates and shorter terms. Online loans are convenient, but may have higher interest rates than traditional lenders. Banks may offer lower interest rates or longer repayment periods. Keep in mind that traditional lenders have stricter eligibility requirements and may require you to have good or excellent credit to be approved.
Online security concerns. Applying for an online loan through a reputable lender is typically safe, but be sure to pay attention to the security measures in place. These include encryption, secure servers and data protection policies. To avoid falling for a scam, research each lender before giving them any information.
Potentially lower loan amounts. Online lenders are convenient for smaller loans, but they may have lower borrowing limits. If you need a larger loan amount, exploring traditional options from a brick-and-mortar lender may be necessary.
How do you know if an online loan is right for you?
Before you dive into online loans, think through what you need and what you can afford.
Evaluate urgency. If you need immediate funds or have time-sensitive expenses, the speedy online loan process may be a good option.
Assess your creditworthiness. Request your free credit report from the three major credit bureaus — Equifax, Experian and TransUnion. If you have a sufficient credit score, you can explore competitive interest rates from online lenders. For those with poor credit or no credit history, online lenders specializing in “bad credit loans” may be more accommodating than traditional banks.
Compare loan terms. Examine your personal finances and be realistic. Consider how much — including interest — you can afford to make in monthly payments. Review the terms, interest rates and fees offered by online lenders. Then, compare all of your options to ensure you get the best loan rates and terms for your situation.
Consider the loan amount. If you need a significant amount of funds, your online loan offers and options may be narrowed. However, it is still worth exploring online lending in addition to traditional banks and financial institutions.
DISCLAIMER: This content is for informational purposes only and should not be considered financial, investment, tax or legal advice.
