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If you're thinking about getting a personal loan, you may have noticed online-only lenders in the course of doing your research. But can you trust a lender when you can't walk into a local office and talk to them?
While you should always be wary of sharing your information online, many online lenders are trustworthy companies that operate in a regulated industry. Unlike big banks, online lenders tend to specialize in a specific type of funding, such as personal loans, and work with customers that traditional banks may pass over. As a borrower, you could benefit from more accessible loans, low interest rates, and a quick application and funding process.
The Difference Between Online Lenders and Traditional Lenders
Online lenders are generally financial technology (fintech) companies, many of which launched and grew in the years following the Great Recession. Some online lenders partner with banks to fund the loans, while others use different sources of funding, such as a peer-to-peer model that connects investors and borrowers.
Online personal loan lenders tend to distinguish themselves from traditional lenders in several ways:
- They focus on one or two products. An online lender might only offer one product, such as a personal loan, rather than a full range of banking services. Some have grown, however, and now offer more than one product, such as personal loans and personal lines of credit.
- They automate much of the application review and underwriting process. The focus on technology, automation and use of alternative data allows online lenders to quickly make a decision when you apply for a loan. While this method of loan approval may make some borrowers nervous, reputable lenders can make this process safe and efficient.
- They work with a wide variety of borrowers. Banks tend to offer personal loans only to the most creditworthy applications, if at all. Some online lenders also primarily work with those who have excellent credit, but others focus on serving people with poor credit.
Not to be outdone by online-only lenders, some banks and credit unions have launched their own online platforms or partnered with fintech companies to offer personal loans. These may be similar to the personal loans you can receive from online-only lenders.
Online Personal Loans Are Increasingly Popular
Online personal loans are relatively new compared with other types of loans, and they make up a small percentage of the overall outstanding consumer debt in the U.S. However, personal loans stand out as the fastest-growing debt category. Experian found the number of personal loan accounts increased by 11% from 2018 to 2019. In 2019, more than 1 in 4 Americans had a personal loan.
The growth of online fintech companies gives consumers easy access to personal loans and is partially responsible for this growth. Many people find they can save money by using a personal loan to consolidate existing high-rate debt or to fund large purchases. In fact, the Federal Reserve Bank of St. Louis found that across the board, consumers who have poor, good or excellent credit receive a lower rate from fintech lenders than equivalent consumers who use a credit card.
How to Find a Trustworthy Online Personal Loan Lender
You may want to start with well-known online lenders or lenders that are offshoots of banks, as these companies rely on their reputation and lending business to survive. For example, you may be familiar with large online-only lenders, such as Avant, LendingClub, Payoff and Prosper, or big banks that offer online personal loans, such as Discover.
If you're not familiar with a company, or even if you know the name but want to do extra due diligence, take a few steps to verify that it's trustworthy:
- Check the Better Business Bureau (BBB). Look for the company's rating and any unresolved complaints.
- Look for news stories about the company. You may find announcements about the company's successes, failures or outstanding lawsuits. These can help you determine which companies you want to work with.
- Read online reviews. You can often find reviews that discuss the pros and cons of different companies. The content of a review may help you make up your mind when choosing between lenders with similar offers.
- Ask friends, family and colleagues. While your financial situation may be different from theirs, asking those close to you for recommendations of companies they've used and trust can go a long way to making you more comfortable. You'll still need to do your own research, though, to ensure the company is sound.
- Check its federal registration. Lenders and loan brokers have to register in every state where they offer loans, and you can often find the page where they list their state licenses by searching the lender's name plus "license." You can then check the license number on your state's website.
There are also warning signs that the website or person is running a scam rather than a legitimate company. Watch out for these red flags:
- You're asked for an upfront payment
- You're guaranteed to be approved for a loan
- You can't verify the company's license or find good reviews online
- You feel pressured to quickly accept the terms
- You can't find the lender's offices when searching online
- You receive an unsolicited call, email or text asking if you want to borrow money
- You don't see "https" in the website's URL—the "s" stands for secure
There are many legitimate and trustworthy online lenders. If you come across a red flag, or something seems too good to be true, it may be best to move on.
How to Apply for a Personal Loan Online
Applying for a personal loan online can be a quick and easy process. You may be able to start with a preapproval application, which can tell you if you're likely to get approved and your potential loan amount and terms without impacting your credit.
If you're not preapproved, you may want to try a different lender or focus on improving your credit before trying again. If you are preapproved, the lender may give you several loan options.
For example, you might be preapproved for up to $10,000 with either a three-, four- or five- year repayment term. Your interest rate and monthly payment will depend on how much you borrow, which repayment term you choose and your creditworthiness. After reviewing your options, you can submit an application.
If you didn't already do so, you might need to submit verification documents after choosing your loan. These could include copies of a government-issued identification, proof of your address, and pay stubs or tax returns to show your income.
Once the lender reviews your documents, it may approve your loan and send you the money. It will generally be electronically deposited into your bank account within a couple of business days.
Online Lenders Can Provide Loans Quickly
Working with an online lender can be a quick and easy process. You can complete the entire application process from your home, there's often a short review process and then the money will get electronically deposited into your account.
You can also easily compare online lenders and your potential loan's terms. And rather than going to each website one by one, you can use a tool like Experian CreditMatchTM to get matched with loan offers from Experian's personal loan partners. Like other companies, Experian may receive compensation from the lenders, but that doesn't impact how or where the personal loan offers appear. You can also filter the results based on your desired loan amount, repayment terms and how you plan to use the money.