Because of their ease of use and the ability to reach customers during times of need, online loans are considered to be an extremely efficient way of lending. This lending approach is especially favored by the millennial population group because of the directness, speed, and simplicity offered by online loans. The online loan market is currently experiencing rapid expansion, with online lenders in the US doubling their market share every 9 months.
Traditional Versus Online Loans
Applications for this type of loan may be submitted online and usually involve rapid approval and payout, ranging from a few days to as little as few minutes. While it is often thought that consumers often opt for online loans exclusively for emergency purposes, this is far from the only reason for their popularity. Online loans involve vastly less bureaucracy than regular bank loans, don’t require personal trips to the bank and waiting in queues, and are more straightforward in regard to the documentation required and their application documents. All of this has contributed to the changing perception of online loans as emergency solutions to a more balanced view that finally acknowledges the tremendous appeal of their simplicity.
The US online loan market consists mostly of unsecured consumer loans at prime or near-prime rates, followed by specialized online loans such as small business and student loans. It is estimated that the online loan market will grow to $90 billion per year by 2020 and that the total addressable market for online loans currently amounts to approximately $1 trillion.
While they don’t involve collateral like some bank loans, it does not mean that they are completely requirement-free or available to anyone. According to a typical online lender, the borrower should meet the following conditions:
- 18+ years old
- Employed in their current job for at least 90 days
- Income at least $1,200 / month
- Has an active bank or credit union account with valid e-mail and phone contact information
Still, these requirements are much easier to fulfill than those of even the simplest bank loans, even those bank loans that are marketed as “instant”. The documentation required is also proportionally simpler, often amounting to just copies of the borrower’s ID, bank card and last salary slip. Some loans may even be requested through a smartphone app or a text message.
Why Considering Online Loans
According to market studies, Millennials (the population group born between the early 1980s and late 1990s) have the most favorable view of online lending, primarily because of the perceived ease and simplicity that online loans offer. While this generation hasn’t yet reached the prime lending age (generally considered to be 40 – 50 years by financial experts), online loan companies are already competing to attract their interest. As a bonus, small online loans — assuming regular repayments — are also viewed as useful tools for building a good credit score before taking out big-ticket, formal bank loans.
Acquiring new customers can be quite a struggle, as the online loan market is fiercely competitive and lenders struggle to offer ever more favorable interest rates, repayment terms and ease of access, offering a large variety of customized terms.
When considering online loans, keep in mind that you have to keep an eye out for small print such as flexible rates, unusual repayment schedules, insurance fees and origination fees just like with regular bank loans. A recent study conducted by the Federal Reserve found that, while consumers were considered quite aware of small print and conditions, many institutions could still benefit from improving their disclosure methods to make their products — online loans included — even more transparent and accessible.
Online Loans Types and Lenders
As the online loan industry expands, more and more specialized loan types are becoming available, including auto loans, debt consolidation loans, and even specialized startup online loans. Maximum loan amounts also keep growing, with amounts of up to $100,000 not unheard-of. However, just because a loan type is available does not necessarily mean it’s the best option for the customer. It is still important to consider a variety of options before making a decision.
An online loan may be based on direct or platform lending models. In the former model, the lender generates a loan from their own portfolio, while in the latter model the platform assists direct lenders by connecting one or more of them to a prospective borrower. Some key lenders in this market (listed with their interest rate ranges) are:
- Citizens Bank (5.99% — 18.99%)
- Marcus by Goldman Sachs (6.99% — 24.99%)
- LightStream (4.99% — 14.24%)
- SoFi (6.26% — 14.87%)
- Prosper (6.95% — 35.99%)
- Upgrade (6.99% — 35.97%)
- FreedomPlus (4.99% — 29.99%)
- LendingClub (6.16% — 35.89%)
- Best Egg (5.99% — 29.99%)
- Avant (9.95% — 35.99%)
- Upstart (8.69% — 29.99%)
- Payoff (5.99% — 24.99%)
- LendingPoint (17.47% — 34.99%)