Understanding Online Loans

Loans, Personal Loans
What Is an Online Loan?

Online personal loans allow you to apply on a lender’s website instead of going into a bank; get an approval decision (usually within minutes); and have the money sent directly to your bank account.

Most major banks do not offer personal loans anymore. If they do, they usually require you to visit a branch to complete the application process, and they tend to lend to those with good or excellent credit.

But many credit unions and almost all newer lenders allow borrowers to fill out a loan application online, and many will lend to people with average or poor credit.

Not all online loans are the same

There are both good and bad online lenders.

A good online lender will check your credit and ability to repay. It will give you an interest rate that reflects its risk at an annual percentage rate of 36% or less. A bad online lender won’t check your credit or whether you can afford the loan, and its rates also will reflect that risk — APRs are typically well into triple digits.

If you search for online loans, you’ll find many websites that promise fast cash with no credit check. These online payday loans can have APRs as high as 1,000% and require repayment on the borrower’s next payday. Some online lenders also offer payday installment loans, which are repaid over a longer period of time but still come with triple-digit rates.

Use a personal loan calculator to see the difference those kinds of rates make in your monthly payments.

If your credit is bad and you really need the cash, try your local credit union first. Credit unions are a good source for small-dollar loans, and because they are member-driven organizations, they often will work with you to make the loan affordable. You can also try nonprofits, religious organizations and other alternatives in your community.

How to shop for an online personal loan

Here are a few tips about searching 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.

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.

The new crop of online lenders, including companies such as Lending Club and SoFi, give applicants an interest rate quote with only a soft credit check. A soft check does not affect your credit score. These lenders typically conduct a hard check once you have selected your loan terms, just before sending you the money.

Is the APR below 36%? The sum of your interest rate and all fees is known as your annual percentage rate, or APR, and it will depend largely on your credit. Financial experts and consumer advocates widely agree that 36% APR is the acceptable limit for a loan to be affordable to a borrower. If an online lender has rates above this limit, that’s a sign that the loan is unaffordable.

Is your documentation ready? You can easily get rate quotes with information you enter from memory, but once you decide to move forward with an application, lenders will require some documentation.

You’re likely to need at minimum some form of identification and documentation of income, such as a paystub or W-2. Some lenders ask for more. You’ll upload the documentation electronically; many lenders accept screenshots or phone photos in addition to scanned documents or PDFs.

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Amrita Jayakumar is a staff writer at NerdWallet, a personal finance website. Email: ajayakumar@nerdwallet.com. Twitter: @ajbombay.


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