Understanding Online Loans

Getting a personal loan from an online lender rather than a bank can be quicker and more convenient. Spotting the good and bad lenders is crucial.
Loans, Personal Loans
What Is an Online Loan?

Traditionally, when you needed money, you visited your bank for a loan. Some banks still offer personal loans, but today you also have the option of online personal loans. Getting a loan online streamlines the process:

  • You compare rates, or prequalify, online
  • You apply on a lender’s website instead of visiting a bank
  • You get a fast approval decision, usually within minutes
  • The lender deposits the money directly to your bank account

Lenders that offer online installment loans

The table below features some of our top picks for online lenders.

LenderNerdWallet ratingGood for...
Discover5.0 stars out of 5Good credit, debt consolidation
Marcus
5.0 stars out of 5Good credit
SoFi
5.0 stars out of 5Good credit
FreedomPlus4.5 stars out of 5Good credit, debt consolidation
LendingClub4.5 stars out of 5Good credit
Avant4.0 stars out of 5Bad credit
LendingPoint4.0 stars out of 5Bad credit

The pros and cons of online personal loans

Lending experiences vary by lender and loan, but you’ll generally encounter the following pros and cons with online loans:

Pros:

  • Convenience: With online loans, you can complete the entire loan process — from prequalification to signing — from your computer or, in many cases, your phone. Some banks offer an online loan option, but you must visit a branch to complete the application.
  • Online lenders look at more than your credit score when making an approval decision.

    No-risk estimates: Most online lenders allow you to prequalify and see estimated rates without committing to a loan or affecting your credit score. Banks and credit unions typically require a hard check for this preliminary step. (All lenders, whether online or brick-and-mortar, typically require a hard credit check before you finalize a loan.)

  • Credit plus more: Online lenders look at more than your credit score and credit report when making an approval decision — they may consider your education or occupation, or ask to scan your bank account transactions to assess your financial behavior. This can improve your chances of getting a loan if you’re new to credit or have a low score.
  • Quick, simple shopping: It’s easy to compare rates from multiple lenders: Online prequalification takes a few minutes, and comparison sites allow borrowers to see loan offers from multiple lenders after filling out a single application form. You can do this on NerdWallet’s lender marketplace.
  • Debt help: Some online lenders allow borrowers who take a loan to consolidate debt the option to send money directly to creditors, improving the chances of successfully paying off debt

Cons:

  • Costlier than credit unions: On average, loans from online lenders are not as cheap as those from credit unions. Since each online lender uses its own underwriting formula, you may get different rates from each one. It’s essential to compare rates from multiple lenders before you take an online loan
  • Reputable online lenders compete alongside predatory online lenders.

    Sometimes not so simple: The application process for some types of personal loans — including secured and co-sign loans — can be more complex than that for unsecured personal loans, where approval is based largely on income and credit history

  • Large loans only: Loans under $500 may be hard to find at rates below 36%. Most online lenders have loan minimums of $2,000. A local credit union, while not as immediate, is usually the best place to look for small loans.
  • Predators lurk: Reputable online lenders compete alongside predatory online lenders. Reputable lenders check your credit and ability to repay the loan, with annual percentage rates that top out at 36%. Predatory lenders advertise that they don’t look at credit. You pay the cost of this added risk, in the form of interest rates that can top 700%.

How to shop for an online personal loan

Here are a few questions to ask as you search for online loans:

Is the site secure? Before you provide your personal information, always check to see that the lender’s site is secure. This typically means that the URL starts with “https” instead of “http.” You should see a little lock symbol beside the URL. Most reputable lenders also have a badge or icon that displays their security certification.

>> MORE: 5 red flags of a toxic online loan

Before you provide personal information, always check to see that the lender’s site is secure.

Does the lender check your credit? A reputable lender checks your credit. Many new online lenders consider additional factors, such as your education history or profession, but in conjunction with your credit score and credit history. If an online lender says it does not check your credit at all, that’s a red flag.

>>MORE: Preview your credit score

Is the APR below 36%? The sum of the interest rate and all fees is known as the annual percentage rate, and the APR you receive largely depends on your credit. Financial experts and consumer advocates agree that 36% APR is the acceptable limit for a loan to be affordable to a borrower. If an online lender offers rates above 36%, that’s a sign the loan is unaffordable, even if the monthly payment fits your budget.

>>MORE: What’s a good rate on a personal loan?

Is your documentation ready? You can easily get rate quotes by providing your name, date of birth, the last four digits of your Social Security number and other information you enter from memory, but once you decide to move forward with an application, lenders will require documentation, including a form of identification and proof of income, such as a paystub or W-2. You’ll upload the documentation electronically; many lenders accept screenshots or phone photos in addition to scanned documents or PDFs.

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