What is an online personal loan?
Personal loans can be used for a variety of purposes, such as consolidating debt, paying for home improvements, or covering unexpected expenses. A personal loan is considered unsecured because it is not backed by collateral. An online loan is a convenient way for you to get a personal loan without having to set foot in a bank or credit union. You can complete the entire application online and, upon approval, receive the money in your account within one to three business days. Approval criteria and interest rate depend on the financial institution.
What are the advantages of an online personal loan?
Online loans are convenient and fast. Many lenders allow you to prequalify and see custom rates and terms before you apply. This is known as a soft credit check and will not hurt your credit score. You can see what conditions you qualify for before applying for the loan. Online loans also allow you to easily search and compare lenders.
After completing the online application, you can be approved within minutes. Some financial institutions will deposit the money into your account on the same business day. All of this can be done without having to pick up the phone or physically go to a bank.
What are the disadvantages of an online personal loan?
Approval for an online loan will be based on your creditworthiness and other factors such as your work history and income. If you don’t have a good credit history or a good credit rating, you may not qualify for a loan or get the best rates. Many local community banks focus on developing close relationships with their customers. Therefore, if you need a loan but cannot meet traditional bank loan approval requirements, community banks may be more willing to help.
Online loans can be more expensive than loans from a credit union. So it’s important to shop around and see the best rates you qualify for. Many online lenders don’t have physical branches, so you won’t be able to talk to someone face-to-face.
There are also predatory lenders who offer personal loans online. Payday loans are usually $500 or less and must be repaid on your next payday. Depending on state laws, people can get payday loans online or through a storefront lender. Although they don’t require a credit check and you may qualify for cash online, a typical two-week payday loan can have annual percentage rates (APRs) of up to 400%. By comparison, credit card APRs can range from 12% to 30%. Payday loans should be considered a last resort.
What to look for in a personal loan
When looking for the best personal loans online, you need to consider a variety of factors.
- Annual percentage rate (APR). This is the interest rate of the loan. Rates can vary from 4.99% to 35%. Rates are based on creditworthiness and loan term.
- Amount of the loan. Many lenders have a cap of $50,000, while some can go as high as $100,000. You will need excellent credit to be able to borrow the maximum amount.
- Repayment Terms. Lenders will offer different repayment options, ranging from two years to 20 years. The shorter the term, the lower the interest rate. However, the amount of the monthly payment will be higher.
- Discounts. Some lenders will offer a discount for autopaying or bundling other loans. Ask to see what discounts you qualify for.
- Costs. Lenders may have origination fees or prepayment penalties. Check the fees when comparing lenders.
- Cosigner. If your credit score is low, you should consider applying to a co-signer who has better credit. Check to see if the lender you are considering allows co-signers.
How to compare online lenders
When looking for the best personal loan online, shop around for the best rates. You can choose to get an online loan from a regular bank, a credit union, or an online-only bank. Online banks usually have better rates because they don’t have the same overhead as regular banks.
- Check your credit report and credit score. Your score will determine if you qualify for the loan, your interest rate and terms. An excellent credit score is one that is 800 or more. The better your credit rating, the better your interest rate. If your score is low, it may be best to work on improving your score. The difference can be thousands of dollars depending on the loan amount.
- Determine how much you want to borrow. Personal loans range from $250 to $100,000, depending on the type of personal loan. Refer to your budget to see how much you can afford in monthly payments. You can use a personal loan calculator to estimate your interest rates and payments.
- Shop around for the best rates. Contact different lenders to find out the loan rate and terms you qualify for. You can research multiple lenders online to find the best loan term for you. Many lenders have a pre-approval process that allows you to seek out the best interest rates without hurting your credit score.
- Compare other personal loan features. Compare lenders to see if there are any additional fees such as origination fees or penalties for prepaying the loan. Some offer features like flexible payment dates, interest rate discounts, or the ability to add a co-borrower or co-signer.
- Apply for a personal loan. Once you have selected a lender, you will need to submit an online application. They will perform a rigorous credit check which will impact your credit score. They will process your request and disburse the funds the same day or up to several days later.
How to apply for a personal loan online
Lenders will have different processes for getting a personal loan online, but most will ask you to follow these steps:
- Complete a pre-approval form. Many lenders have an online pre-approval form where you can enter your personal information. You will need to provide your work history, income, debts and any other information they require.
- The lender checks your credit. Lenders will then check your credit score and history to determine if it meets their minimum requirements. This is usually a soft credit check that won’t hurt your credit score. If a lender doesn’t have a pre-approval option, you won’t know the terms of your loan until you apply, which will impact your credit score.
- The lender gives pre-approval. If you qualify for a loan after the lender has checked your credit, they will let you know the terms you qualify for, such as the maximum amount, interest rate, and repayment terms. The minimum credit score depends on the lender. A pre-approval does not guarantee that you will be approved.
- Make a formal request for a personal loan. Once you have chosen the lender you want to work with, you officially apply on their website. This usually requires documentation and a rigorous credit check by the lender. If you are not eligible for a loan, the lender will notify you with an unfavorable letter. It will give a reason why you were denied, the credit agency used, and how to get a free copy of your credit report.
- Accept the loan agreement. Once approved, you sign your loan agreements online and set up your loan for funding. Many banks will disburse the money the same day or the next business day.