If you're in need of cash, an unsecured personal loan can get money into your account quickly.
What's the difference between a secured and unsecured loan? Secured loans are backed by an asset, such as a vehicle or home, which is taken by the lender if you can't repay the loan. Unsecured personal loans are extended based solely on your ability to repay, as determined by the lender.
Until relatively recently, you needed to go to a local credit union or bank to take out such a loan. However, some people are now turning to online lenders instead. Applying for a loan while sitting at home can be tempting, but should you consider a personal loan from an online lender?
What are the pros and cons of online lenders?
Online lenders like Lending Club, Upstart and Earnest don't have any physical branches and offer borrowers one big advantage - convenience. Both online and offline lenders often allow you to submit pieces of the application online, such as a paystub or driver's license, but with an offline lender you may need to sign the final documents at an actual branch. Online lenders handle the entire application process online.
You might be hesitant to submit your personal information online, but the reality is that even offline lenders may take your information and enter it into an online database. When using an online lender, choose one that has a reputable name. You can read reviews of the lender, look for complaints filed with the Better Business Bureau and look for news stories that mention the lender.
Sharing personal information, such as your income, employer and outstanding loans with any type of lender is an important decision that should be taken with caution, but it shouldn't necessarily scare you away, either. If you're financially responsible, you should want the lender to see that so that they may be able to offer you a better interest rate.
Another benefit of using an online lender is that it allows you to avoid sales pitches. If you're looking for a personal loan and inquire at a bank or credit union, they may try to sell you a checking account or other financial product. Online lenders typically focus solely on lending.
There are potential drawbacks to using an online lender. One is that all online lenders can issue loans in every state. For example, if you live in Idaho or Iowa, you can't borrow using Lending Club.
Some lenders may charge fees whenever your loan is approved. For example, Prosper may charge a closing fee of up to 4.95 percent of the amount borrowed, although this rate is dependent on your borrower rating. The better your rating, the lower the fee.
How does your credit score impact the lender's decision?
Because unsecured personal loans aren't backed by collateral - such as your car or house - your financial situation may be closely scrutinized. Some lenders may require a minimum credit score. For example, online lender Payoff requires a score of at least 660. However, your credit score or report likely isn't the only factor they will consider, and sometimes isn't even the most important one.
Dan Macklin, a co-founder of online lender SoFi, says that derogatory marks on a credit report, such as bankruptcies or late payments, can be red flags. But SoFi also looks at whether the applicant's income will be strong enough to support the loan repayment as well as the other financial commitments found in the applicant's credit reports.
Some online lenders will also consider your employment status and educational background when making their decision.
What should you consider before taking out a personal loan?
Depending on your credit score, the amount of money you need and how quickly you need the money, you should consider your options and find one that seems like a good fit.
- Effects on your credit score. Some lenders do a soft pull on your credit when considering your application, which doesn't affect your credit score. If you're considering a lender, ask before submitting an application because many lenders do a hard pull, which can affect your credit.
- The offered terms. Based on your application profile, the lender might offer you several different repayment periods to choose from: three, five or ten years for example. The interest rate and monthly payments can vary depending on which terms you choose. Both on- and offline lenders have maximum loan amounts - for example, Lending Club caps a loan amount at $35,000. SoFi caps their loan amount at $100,000. For offline lenders, Citibank caps their personal loan amount at $50,000 and Wells Fargo will loan up to $100,000.However, with online lenders, you may only be approved for just a portion of the loan you wanted. You need to decide if the lesser amount is okay, or if you should try to get approved for the full amount with a different lender.
- The overall cost. The interest rate you receive is often the most important factor when it comes to your overall repayment costs. For example, Lending Club's fixed-rate loans start at 5.32 percent, but US Bank's start at 8.99 percent.
- Additional fees. In addition to interest, both online and offline lenders may charge fees. For example, lenders may charge a balance transfer or origination fee when you receive the money. Lending Club charges one to five percent of the amount borrowed while TD Bank charges a fixed $50. The fee may be taken out of the loan amount.Some lenders also have a prepayment penalty, meaning you can't pay off the loan early without being charged a fee. You may be able to find a lender that doesn't charge these fees for personal loans - Upstart or Lending Club, for example.
- The turnaround time. Keep in mind that while both online and offline lenders may be able to loan you money within a day or two, speed can come at a price. Louis Beryl, CEO and co-founder of Earnest, a merit-based online lender, says that if a lender doesn't take the time to analyze your profile, "they can't be assessing you appropriately and giving you your deserved rate."
Online lenders may be able to offer you a personal loan quickly, easily and with good terms. To make the best decision, consider shopping around before choosing a lender and remember it's up to you whether or not to accept the loan's terms.
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