Online lending has become a booming industry in recent years, providing loans to countless people who prefer the ease, speed, and competitive rates of online lenders. Online lenders don’t have many of the costs of brick and mortar banks, and often approve people who have been turned down by traditional financial institutions, helping them find attractive loan rates from lenders who compete for their business.
Online personal loan lenders do provide quick, easy to get loans to people with less than ideal credit, but there are some caveats. The companies are less regulated and the loans they provide tend to have a lower maximum than those provided by traditional financial institutions. That’s part of the trade-off though for the ease and speed of online lenders and for most people looking for personal loans, the lower limits are still more than enough.
Pros and Cons
- Loans approved quicker and easier
- Short term, smaller loans provided
- Flexible loan requirements
- Applications are simple and easy
- Borrowers don’t need an ideal credit score
- An easy way to receive an unsecured loan
- Allows you to take out bigger loans
- Better terms and lower APR
- Better regulation of lenders
- Easier to get government loans like SBA loans
- Limits on the size of the loan you can take
- Higher APR than traditional bank loans
- Less regulation of lenders
- Danger from data breach, hacking
- Government assistance loans like SBA
loans are much harder to get
- The approval process is much slower
- Tougher criteria for getting a loan
- Harder to get approval for unsecured loan
- Borrowers typically need to have very good credit
- Small, short-term loans tend to be harder to get
How Long Till I Get My Money?
Going to a traditional bank to receive a personal loan is typically a long, drawn-out process that can deter a lot of people from even trying. It requires going in person to your bank branch loaded down with documents for your application and it can be weeks before you gain approval much less see the money in your account. With online lenders the process is streamlined and largely automated and with some companies, like LendingTree approval can take a matter of minutes and you can see the money in your account within 48 hours. Some companies can take as long as a week or so to approve a loan, which is slow for online lending, but still quicker than a traditional bank.
How Much Can I Borrow?
For the most part, loans from online lenders have lower limits than those you can receive from a traditional bank. Assuming you’re able to qualify for a loan with a traditional bank you can potentially receive a bigger loan with better rates and terms. That said, some online lenders like Even Financial and SoFi can provide personal loans of up to $100,000, which should be enough for most borrowers.
On the other end though, online lenders can help if you need a loan that’s too small. While most financial institutions ask for a minimum of several thousand dollars, online lenders can provide loans for as little as $1,000, which can come in handy if you just need a small influx of cash and your bank branch won’t make it happen. This can often be the type of thing just to help you with a small purchase, to make it through the holidays or take a short trip, and not for anything major that justifies a long loan process.
What are the Loan Requirements?
Online personal loans have less requirements than banks, which is part of the reason why the maximum loan is smaller and the APR and other terms less friendly to borrowers. Simply put, the lender is taking more of a risk, so they’re making sure to cover themselves and make it worth it on their end.
At a traditional bank you’ll be asked to bring in documents about your financial history and taxes, and if you own a business, they’ll want to take a look at the books for the past few years.
Furthermore, banks tend to avoid unsecured loans. These are loans that don’t require the borrower to put up any collateral. With these loans, though the borrower doesn’t have to worry about putting a house or a car up, they usually receive less friendly rates from the lender. Banks tend to avoid these loans because they are high risk, so if you don’t have collateral to put up or you would just prefer taking out an unsecured loan you’ll probably need to go to an online lender. If you do take out one of these loans though, keep in mind you’ll probably see the difference in terms of the APR and interest.
Most financial institutions also tend to limit their loans to people with good or close to perfect credit. If you don’t fit the bill, you’ll be better off with an online lender, who tend to be more forgiving when it comes to your credit score.
What are the Terms of the Loan?
If you do receive a loan from a traditional bank, the terms will be better, even though the path to get there should be tougher. Because they limit their lending to people with good or better credit and a low risk of default, you can expect to pay around 5% APR or lower. With online lenders, the APR can range from 5% to over 36%. They also tend to offer shorter repayment schedules, though with LendingTree the loan terms can run from 3 months to 180 months.
How Much Credit Do I Need?
These days banks are reluctant to give loans to anyone with a credit score lower than around 700-800, and if they do it will require putting up some serious collateral. Online lenders are less stringent on credit scores, though many won’t accept borrowers with very poor scores or lower. A few online lenders do not require a minimum credit score.
How Easy is the Application Process?
Getting a traditional bank loan from your local branch can be a long, complicated process. You’ll probably need to show up in person and present your case with reams of documentation, including financial and tax records and some example of collateral. On the other hand, you could potentially apply for an online loan in your pajamas from the back porch in less time than it takes you to read this article. Online lenders do require you to upload some documentation and/or fill out online forms, but the pre-approval process is quick and you are more likely to receive a loan.
What About Reputation?
When it comes to reputation, traditional banks still do have the upper hand. They have the advantage of legacy, reputation, and resources. Online lending is still the new kid on the block and there is still a bit of trepidation from much of the public towards online lenders. IUn addition, banks are regulated by an independent authority, but online lenders are not. If you decide to go with an online lender, do some due diligence and market research on your own to find one that has a top-notch reputation.
How Secure is the Process?
Established banks traditionally have very high security and are also well policed and regulated by federal and state bodies. These organizations require security measures as a stipulation of approval and insurance, something that doesn’t apply to online lenders.
With online lenders, you should look for a TrustE or similar certificate that guarantees that the lender follows security protocols and uses a high level of encryption with customer data. You can run the risk of being victim of a data breach or hacking with online lenders, so make sure that the company you go with takes security seriously.
Is There Government Assistance?
Many borrowers, like small businesses, can qualify for a loan that is backed in part by the government’s Small Business Administration. This in teurn means better loan terms and a higher rate of success for loan applications. Some internet loan marketplaces like LendingTree and Lendio also offer SBA-assisted loans, but for the most part this is a feature of traditional banks.
If you can meet the requirements and have the time and patience needed, a traditional bank loan can present you with better conditions that are easier on the pocketbook. We don’t live in a perfect world though, and if your credit is a bit less than perfect or you don’t have collateral or you just don’t feel like jumping through all the hoops, then an online lender can be an easy and beneficial route to get you some financial assistance.