A personal loan online or offline is when you borrow money from a lender and pay it back over a set period of time over a fixed period of time – repaying principal plus interest. The amount you can borrow, as well as how much interest you’ll owe, largely depends on your credit history and income. A personal loan can be backed up by collateral, such as a car or a house, and is known as a secured loan. An unsecured personal loan, commonly referred to as a signature loan, is a loan that has no collateral. Unsecured personal loans typically have higher interest rates than secured loans.
Where does one go if they want a personal loan? Well, you can get a personal loan from just about any brick and mortar bank or credit union. Or you could get a loan from one of the many online financial institutions that have entered the market.
Are there benefits to getting a personal loan online as opposed to a typical brick-and-mortar financial institution? Absolutely! However, as with any financial decision, one should also look at any potential downsides. Let’s take a look at both the pros and cons of getting a personal loan online to help you decide if it’s the right choice for your situation.
Getting A Personal Loan Online
The first step many online lenders take is to pre-qualifying applicants, usually with a soft-credit check. This kind of credit check does not affect your credit score. A hard-credit check is done during your actual application for approval, and many hard-credit checks can negatively impact your overall credit. When applicants are pre-qualified, the lender is able to offer you a more accurate quote on interest rates and payment terms.
Online lenders do not have as much overhead as a typical ‘in-person bank’ does. With less overhead they are able to offer much more competitive interest rates. Because the online lending industry is so profitable, there is a lot of competition out there among lenders. This high level of competition drives interest rates down even further. The process of getting a personal loan online will also typically come with better options when compared to a traditional bank. These features are often in the form of flexible payment terms, no fees, or options to lower your interest rate as you make timely loan payments.
You Can Get A Personal Loan Online With Bad Credit
Some brick-and-mortar lenders will only cater to consumers with great credit scores (720+), while some have no problem lending to consumers with credit scores in the 600’s or even lower sometimes. The same goes with lenders offering personal loans online. Some of them will only want applicants with great credit, while some have no problem taking a risk on consumers with less-than-average credit scores and credit histories. This is why it’s best to research lenders as much as possible beforehand.
Getting an unsecured personal loan online requires a better credit history than approval for a collateral-backed secured loan. If you have a low credit score, a high debt-to-income ratio, or a poor history of timely payments, you can still get approved for a personal loan. Those with poor credit histories or bad credit scores should consider:
- Collateral: Many things can be used as collateral for a secured personal loan. A car, boat, house, or even a Certificate of Deposit (CD). Collateral will usually make you much more appealing to potential lenders.
- Co-Signer: Having someone else as a backup in case you fail to make timely payments is a great way to get a lender to reconsider your application. A relative or close friend with a higher credit score and better credit history than you would be a great option.
Brick-and-Mortar Institutions Have (A Few) Benefits
Getting a personal loan online shouldn’t be seen as the magic silver bullet of personal loans. In fact, you should never look at any specific financial option as a magical solution to perfectly solve your problems. Brick-and-mortar institutions may be a better choice for some people out there, depending on their preferences and current financial situation.
Credit Unions are not-for-profit and, because of that, they are often willing to work with consumers who have fair or poor credit. With them not focusing on profit, they can accept risks that traditional lenders may not be willing to take. On top of that, their interest rates are often lower because, again, they aren’t trying to make a profit. Some lenders do not offer loans for less than $2,500 whereas credit unions often do. If you need a personal loan that small, you should try a credit union first.
Traditional Banks often require good or great credit. The only benefits for going with a traditional brick-and-mortar bank would be for those who are already a customer of said bank and want to take advantage of any discounts or featured offered to current customers. Additionally, there are those consumers who simply insist on doing business in person.
How To Choose A Personal Loan Online
- Shop Around For Low Rates : You should always shop around and get quotes from multiple lenders, especially for high-dollar loans. Pay more attention to the interest rates than to just what your monthly payment would be.
- Look Beyond Interest Rates: Take a look for any hidden fees, or leniency with repayment options. Lack of fees and/or extra leniency or features can be extremely beneficial in the long run.
- Check Your Credit Beforehand: You should know what your credit looks like before even applying. This can give you an idea of what to expect and help you avoid any potential bait-and-switch tactics. (Though the old bait-and-switch is pretty rare these days.)
- Compare With Multiple Websites: If you’re using online comparison tools, it is suggested to check multiple comparison websites. One comparison website may have outdated or just false information. Try and find the best comparison sites with the most up-to-date information.
Rates matter, but should not be your sole decision-making factor. A 0.5% difference in interest rates for a 5-year $5,000 loan will have you paying about $12 more over the course of a year. $1 per month more might be okay if the company with the lower interest rate charges more in fees, or doesn’t have as lenient of a repayment policy.
One final thing to consider: When shopping around for rates, do not look solely at the interest rate. Compare the APRs or Annual Percentage Rates. The APR is different from the interest rate itself as it consists of the interest rate AND any extra fees you would have to pay. If you don’t consider the APR, it’s entirely possible to go with the company that has a lower right yet end up paying more over time.