Online Loans

Why and How to Borrow Online

Looking online
••• Getty Images

Online banking has been around for many years, but online loans have been slower to adapt. Fortunately, there are now plenty of good online lenders to choose from. It's similar to getting a loan anywhere else, but much more convenient. You'll need to provide personal information such as your Social Security number and address, and depending on the lender, information about your job, income, and expenses. To get started, just pick a lender and apply; the process should only take a few minutes.

Benefits of Borrowing Online

The newest generation of lenders are focused on making borrowing as easy as possible. Online lenders can almost tell you instantly whether or not you're approved, how much you can borrow, and what your payments will be. Most traditional banks are different; even if you fill out an application online, it may take a while to get an answer because somebody needs to review it. Online lenders also tend to offer better interest rates and smaller service fees (if any) than traditional banks because they don't have the same overhead costs as banks and credit unions with physical branches.

You also benefit from better approval chances with online loans. Banks and credit unions have grown cautious over the years. It's easy to get a loan if you've got great credit, but if you're still building credit or been through some hard times lately, a standard FICO score will not do you any favors. Online lenders are more likely to approve lower credit scores and use alternative information to evaluate your creditworthiness—such as utility payments, debt-to-income ratio, and even data from your social networks.

Most online loans are unsecured, meaning you don't pledge collateral to help get approved. That can make them safer than borrowing against your assets. If you fail to repay an unsecured loan, your credit score will drop, but your car won't get repossessed and you won't face foreclosure.

Marketplace Lending

The best loans online come from non-traditional lenders that are focused solely on making a specific type of loan, and not offering checking and savings accounts, credit cards, or business services. The earliest lenders to this space were peer-to-peer (P2P) lending services, and those are still great options for borrowing. P2P lenders started with business models similar to eBay, where anybody could apply for a loan by creating a public listing asking for money, and anybody could bid to lend. The lenders would pick an interest rate that they wanted to earn and loans were funded at the lowest interest rates available.﻿﻿

Over time, the system has become more complex. In some cases, individuals don't do the lending anymore—banks and other large institutions are the funding source behind several prominent marketplace lenders.

Avoid Payday Loans

When searching for online loans, you'll find plenty of results for loans that are essentially payday loans. These are high-cost, short-term loans that typically result in an expensive debt spiral. You can identify these loans in the following ways:

  • Short terms: Payday loans get paid off within a month or so. You should look for loans that you make monthly payments on over several years, and that you can pay off early without any prepayment penalty.
  • High interest rates or fees: Payday loans will be dramatically more expensive than marketplace lenders. You can get a credit card with a 20% APR, and many online loans charge substantially less. If you're going to pay more than that, you're probably getting a bad deal.
  • No credit check: You need decent credit to get a decent loan. Anybody who will lend to you without checking your credit is taking a risk, and they'll expect to be compensated for it.
  • Up-front payments: Don't borrow from an online lender that demands payment upfront. Legitimate lenders might charge fees, but those fees come out of your loan proceeds. Advance payment scams are notorious for asking you to hand over money and then providing nothing in return.

The Bottom Line

To get a great loan, you need to shop around, and online lenders need to be included in your search. Stick with reputable lenders, and you should be able to avoid trouble. Banks still provide valuable services and convenience, but they're not always your best option for borrowing.