Online Loan

Online Loan
An online loan is a loan acquired through the internet. There are many different kinds of online loans. Some of them are safe, while others are not.

What is an Online Loan?

Simply put, an online loan is money that’s borrowed from a lender who operates online. While the specific process for an online loan can vary from lender to lender, there are many ways in which it’s the same across the board.

How does an Online Loan work?

To get an online loan, you’ll need to visit a lender’s website and fill out a loan application. Most lenders will then conduct a credit check to evaluate your creditworthiness. Based on what they determine, they’ll decide whether to approve your application.

If you’re approved, your lender will deposit funds directly into your bank account. When it comes time to repay the loan, some lenders will automatically withdraw the money. They remove the amount you owe, so make sure you have enough money to cover the payment.

Are Online Loans safe?

It depends. With traditional lenders, you usually need a good credit score to get approved. Many online lenders do not require good credit, and some don’t check your credit at all.

While this may sound great, not all lenders who offer no credit check loans (or the notorious bad credit loan) are trustworthy. Many online payday and title lenders conduct no credit check whatsoever. They profit when you miss payments—they get to charge you extra fees and interest—and some of them, in fact, depend on this to make money.

Credit checks help ensure that you don’t qualify for a loan that you can’t afford. If you’re looking for an online no credit check loan, consider lenders who conduct a “soft” check on your credit that determines your creditworthiness in other ways. In addition, avoid payday and title lenders that have been linked to predatory practices.

How are Online Loans different from other loans?

Many people find online loans more convenient than traditional loans from brick-and-mortar lenders. The application process is conducted entirely online, and the money is deposited directly into your account.

Online loans are also typically faster than traditional loans. Online lenders can approve or deny a loan application in a matter of minutes, whereas traditional lenders often take days or even weeks. Once you’re approved, you can receive your money as soon as the next business day.

In addition, you might be able to find a lower interest rate through an online lender than with a traditional financial institution. This is because operational costs for online lending are relatively inexpensive compared to brick-and-mortar locations. The lenders take those savings and pass them on to you.1

What are the main types of Online Loans?

There are four main types of online loans: payday loans, title loans, P2P loans, and personal installment loans.

Payday Loans: Payday loans are short-term loans with very high-interest rates. The typical term for a payday loan is only two weeks long, and the average APR is around 300 percent.2 The average payday loan principal is $350. Payday loans are designed to be paid back in a single lump sum—an arrangement that can make it difficult for many borrowers to repay the loan in full. If you’re unable to pay back your loan, many payday lenders will give you the option of rolling the loan over. This means that you pay off only the interest owed on the loan—usually around 15 to 20 percent of the principal loan amount. The lender then gives you a new loan term, complete with additional interest.

Rollover is banned in many states (and limited in others) due to its predatory nature—it is all too easy for borrowers to keep rolling the loan over, paying more and more every time without ever getting close to paying off the loan. Payday lending is also banned in some states, which makes it illegal for online lenders to offer loans to customers who reside there.

Title Loans: Title loans are similar to payday loans in several respects: they are short-term loans that have APRs around 300 percent and can easily trap borrowers in a cycle of debt. But unlike payday loans, title loans are secured by the title to your car, truck, or motorcycle. If you then default on your loan, the lender can seize the vehicle and sell it to recoup the money you owe.

Because title loans are secured by high-price items, they can come with much larger loan amounts than payday loans. With a title loan, the average borrower receives anywhere from $100 to $5,500, while the average payday borrower receives only $350.3 Title loans are often made on a monthly basis and (like payday loans) require lump-sum repayment. The average monthly interest rate is 25 percent, and if you can’t pay your title loan, the lender will often roll the loan over. Title loans are banned in several states, which prevents online title lenders from lending to their residents.

Peer-to-Peer Loans: Peer-to-peer loans are a type of loan in which you receive money from an individual rather than a financial institution. Also known as P2P loans, they’re funded by private investors. Many peer-to-peer loans are arranged online by sites that connect borrowers with private lenders. Peer-to-peer loans come with interest and fees.

Personal Installment Loans: Personal installment loans are often the safest option for online loans, but you should still be careful when dealing with them. There are many installment lenders whose rates are very high and who do not check your ability to repay.

Unlike payday or title loans, installment loans are designed to be paid back in a series of regular payments. These payments are referred to as “installments,” which is where the loan gets its name. Making payments in a series of regular installments—instead of in a single lump sum—often makes personal installment loans much more affordable for many borrowers.

Bottom Line

Online loans can be a convenient way to get fast cash. But not all online lenders are safe or reputable. If you’re considering an online no credit check loan, consider lenders that conduct soft checks. Also, be sure to do your homework to find a loan with a good APR and borrower-friendly payment terms.

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Works Cited:

1 Pritchard, Justin. “Online Loans: Why and How to Borrow Online.” The Balance, 4 Jan. 2017, https://www.thebalance.com/online-loans-315614. Accessed 7 April 2017.

2 “Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings.” Consumer Financial Protection Bureau, 24 April 2013, http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf. Accessed 7 April 2017.

3 “Auto Title Loans: Market Practices and Borrowers’ Experiences.” Pew Charitable Trust, March 2015, http://www.pewtrusts.org/~/media/assets/2015/03/autotitleloansreport.pdf. Accessed 7 April 2017.