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Online loan providers provide many of the same products as traditional lenders, such as mortgage loans, personal loans and credit cards, but lack physical branches and conduct all of their business over the internet.
They're also set apart from their brick-and-mortar counterparts because they tend to specialize. While banks, credit unions and other traditional lenders typically offer a wide range of products, such as mortgages, car loans, student loans, personal loans and credit cards, many online lenders focus on just one of those offerings. They may even specialize in lending to a particular type of borrower or borrowing purpose.
If you're in the market for a loan, an online lender may be able to provide one that has better terms than you'd be able to secure through a traditional lender. Before you start your search, however, familiarize yourself with how they work and what to expect.
How Do Online Loan Providers Work?
Applying for an online loan often entails two steps. First comes prequalification—a quick screening that will require you to provide a few personal details (name, address and Social Security number) and answer a few quick questions about your borrowing requirements and income. Once that's submitted, a soft inquiry check of your credit score may be performed and your responses reviewed before you're approved to move on to the second step, loan application. You'll be able to submit a formal loan application based on an offer that specifies a range of loan amounts, a range of interest rates that could apply to the loan, and potential fees associated with the loan.
Depending on the size and the type of loan, you may be asked to submit some documentation along with the loan application, including proof of identity (copies of a photo ID) and employment (recent pay stub), and evidence of income (a recent pay stub or tax return). With large loans or mortgages, you also may need to document your savings, investments, outstanding debts and household expenses. This information is typically submitted electronically to online lenders via PDF or can be scanned using the camera on your smartphone or tablet.
Once you submit all required information, the lender typically does a hard inquiry credit check that includes one or more of your credit reports and the credit score or scores based on them. Based on its review of your credit, the lender could decline your application (if it does so based on your credit, it must tell you why), or make you an offer that specifies an exact loan amount and interest rate, with a details on any origination fees, penalties for making late payments or paying off the loan ahead of schedule, and so on.
Before you accept any loan terms, it's always a good idea to seek and compare offers from multiple lenders to make sure you're getting the best possible deal. When you accept a loan offer, the amount you borrow could be deposited into your bank account as quickly as the next day.
Are Online Loans Safe?
While there are many reputable online lenders, it's also relatively easy for scammers to set up legit-looking lending sites, so it's wise to check up on any online lenders you're considering before giving them your personal information.
Hints a provider is less than legitimate include:
- Promises of guaranteed loan approval.
- Lack of a physical address on their website or company background information. (Virtual companies may not have offices open to the public, but they have to exist somewhere.)
- Requiring a credit card number, wire transfer or "application fee" before issuing a loan offer.
- Come-ons for "no credit check loans" or "bad credit loans," which often turn out to be payday loans with extremely high interest rates.
Among the ways to check out online lenders is to look for user reviews at neutral third-party websites and referral organizations such as the Better Business Bureau.
Benefits of Online Loan Providers
Since online loan providers are more varied in their company structure, strategy and funding sources than traditional lenders, they're able to operate a little differently—and borrowers can reap the rewards.
Some are tech startups; others are affiliated with public companies or financial institutions. Still others, typically focusing on personal loans, are peer-to-peer (P2P) platforms funded by other consumers, who fund the loans as an investment.
The man benefits of online lenders include:
- Convenience: Even allowing time for researching each lender, you can likely shop around and get prequalified at multiple online lenders in the time it'd take to visit a traditional lending institution.
- Soft inquiry prequalification: The prequalification process for online loans uses soft inquiries, comparable to those recorded on your credit report when you check your score yourself. Soft inquiries have no effect on your credit scores the way hard inquiries do. (If you move ahead following prequalification and submit a formal loan application, you'll likely be subjected to a hard inquiry that can cause a small dip in your credit score.)
- Fast turnaround: Online lenders may only take a day or two to decide whether to offer you a loan, where a traditional lender could take a week or more to get back to you. Once you accept a loan, funding is fast, too, with the borrowed amount typically deposited in your checking account within the next few business days. You could see a deposit that quickly if you borrow from an institution you already bank with, but otherwise the funds transfer could take several days to fully clear.
- Options if your credit is subpar: Some online lenders specialize in customers who have less-than-ideal credit, so you may be able to get a loan online if your credit is poor, though you should be prepared to pay a fairly steep interest rate if you qualify.
Drawbacks of Online Loan Providers
Potential downsides of borrowing through an online lender include:
- Convenience at a cost: While it's easy to shop around and close an online loan, poking around with local providers—including the neighborhood banks and credit unions where you might already have accounts—could get you better loan terms. It's more effort, but it could be worth it in the long run.
- Lack of face-to-face contact: If you have questions or an issue with your loan, you won't be able to drop by a local office to get information. Most reputable online lenders offer solid support via online chat, email and phone, but hours may be limited.
Where to Get an Online Loan
When searching for a loan from an online lender, you'll have plenty of options in front of you. To help you cut down the noise, consider searching for a lender with the help of Experian's loan comparison tool. It can prequalify you for personal loans, student loans and debt consolidation loans from reputable lenders, and direct you to offers you are likely to qualify for based on your credit score.
Online loan providers provide a great opportunity to shop around for loans and to get a rough idea how much you can afford to borrow—and at what cost in terms of interest and fees. And if you qualify and accept an online loan, you can get your funds extremely quickly.