Personal loans from online lenders: Good or bad idea?

College student compares personal loans from online lendersImage: College student compares personal loans from online lenders

In a Nutshell

Online personal loans can be convenient to apply for and may offer low interest rates. You can also quickly compare loan offers online. But don’t assume your best option for an online personal loan will come from an online-only lender.
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If you need cash, an unsecured personal loan from an online lender can get money into your account quickly — sometimes on the same business day you apply for the loan.

If you’re considering taking out an installment loan online, you’ll have options from online-only lenders and branch-based financial institutions that also offer loans online. Neither is necessarily better than the other, but there are some general pros and cons to taking out a personal loan online.

What are the pros of an online personal loan?

It’s convenient

Online loan applications offer one big advantage — convenience. Both online-only and branch-based lenders often allow you to start the loan application online and upload verification documents, like your paystub or driver’s license. But some branch-based lenders require you to sign the final documents at an actual branch. With an online-only lender, you can be certain the entire loan application process will take place online.

You may apply for prequalification without hurting your credit

Some lenders let you apply for prequalification with a soft credit inquiry, which won’t affect your credit scores. You can submit multiple prequalification applications to narrow your list of potential lenders when you’re shopping for a loan.

When you’re ready to take out a loan, you’ll have to complete a loan application and agree to a hard inquiry on your credit reports, which could affect your credit scores. While hard inquiries do affect your credit, a single inquiry should have only a small impact on your overall credit and shouldn’t deter you from applying for a loan when you need one.

You can quickly compare your options

Comparing lenders and loan offers before accepting a loan may help you get the best rates and loan terms for your needs. Shopping online can make this process easier. If you want to comparison shop, look for a service or website that lets you quickly sort and compare lenders and loan options based on your financial situation and desired loan amount.

It’s a quick application and funding process

The entire lending process could be much quicker if you’re taking out a personal loan online. The application, verification and approval process can be completed from the comfort of your home — you won’t have to find the time to go to a branch to hand over copies of your information or sign documents. Sometimes, you can even get the funds deposited into your account within the same business day or the next business day. 

Some online lenders lend to people with poor credit

If your credit isn’t great, you may still be able to get approved for a personal loan. Some online lenders even specialize in lending to borrowers who don’t have a positive credit history, and they may be able to offer relatively good rates.

But you’ll also want to be wary of lenders that target borrowers with poor credit, as some lenders charge such high fees and interest rates that it could be difficult to repay the loan.

What are the cons of getting a personal loan online?

Who can you trust?

You may already be familiar with banks, credit unions and some of the most prominent online-only lenders. But you may not be familiar with all of the online-only lenders available. It’s OK to be skeptical, especially if you’re about to share personal information online.

Before applying for prequalification or submitting an application, look for reviews of the company online and check for complaints with the Better Business Bureau. The Federal Trade Commission also warns about potential loan and credit card scams, as when a scammer guarantees you’ll get approved but asks you to pay a fee first.

You may get better offers from your current financial institutions

While online lenders may offer good rates, you should still check to see if your bank or credit union offers personal loans. Sometimes, you can get a discounted interest rate if you already have an existing checking or savings account or a large balance with a lender.

If your credit doesn’t fall in the “good” or “excellent” ranges, federal credit unions, which are nonprofits, could be a good option for you. They can’t charge more than an 18% interest rate on loans, while some online-only lenders that offer personal loans to people with poor-to-good credit often max out an APR around 36%. Online lenders that focus on borrowers with less-than-stellar credit may have maximum APRs of around 200% to 300%.

Bottom line

Going online to look for a personal loan can make it easy to compare your options. But even if you decide to get a personal loan online, the loan doesn’t need to come from an online-only lender.

When you’re shopping for a personal loan, consider the lenders’ fees, interest rate ranges, loan amounts, monthly payments and borrower requirements. Make a list of lenders that could be a good fit for your circumstances.

Apply for prequalification if that’s an option. Then compare offers to help make sure you get the best rate and terms possible for your situation.

About the author: Louis DeNicola is a personal finance writer and has written for American Express, Discover and Nova Credit. In addition to being a contributing writer at Credit Karma, you can find his work on Business Insider, Cheapi… Read more.