Could online personal loans be right for you? Personal loans may be used for a variety of needs, from paying off credit cards and debt consolidation to travel, vacation, or wedding expenses. They are also useful for building credit through establishing a repayment history. By searching for personal loans online, you may be able to find convenience and flexibility that you may not be able to get through a traditional brick-and-mortar lender.
Let's explore your options — but first, we'll define a few terms.
Generally, a personal loan is a loan that is not used for business or commercial purposes. A mortgage or a car loan can be considered a personal loan, but these are loans secured against an asset that is being purchased. That asset is considered as loan collateral and can be repossessed for non-payment.
"Personal loans" usually refer to loans that are unsecured, where the lender grants you a loan based only on the evidence that you are likely to repay (a suitable credit score, proof of income, etc.). Types of secured loans where you supply the asset for collateral, such as a savings/checking account, equity in your home, or a car title, may also be considered as personal loans.
Online loans are similar to those from brick-and-mortar banks in that the lender lends money based on risk assessment and charges interest rates that are commensurate with the risk. To determine this risk, the lender will ask for basic personal and financial information, such as:
- Identification: A driver's license or passport is preferred, but a Social Security card and/or other state-issued ID card may suffice.
- Contact Information: Current address, e-mail address, and phone numbers are required. Proof of address is also required, such as a utility bill in your name or a copy of a lease.
- Income: Lenders will require proof of income such as W-2 forms or tax returns, pay stubs, or bank statements. You may also be required to give your employer's contact information as a reference. Lenders will be assessing the likelihood of continued future income at your current level.
- Debts: A summary of other loans and regular debt obligations you have, including the amount of outstanding credit card debt. Your payment history may also be investigated. The greater your debt, the higher the risk to the bank — so pay down credit cards and other installment loans as much as possible before you apply.
- Loan Amount: How much money are you asking to borrow? Typical amounts for online personal loans range from $1,000 to as much as $50,000, but each lender will have different minimum and maximum loan requirements.
You may be asked for other information to verify either your identity (such as Social Security number, birth date, or mother's maiden name) or your financial stability (such as previous addresses and dates of residence or work history).
The online lender will pull your credit report to see your credit score and assess your risk to determine whether to loan you money, and if so, with what interest rate and under what terms. "If you haven't been a reliable credit user in the past, you will have a low score and that's a higher risk to the lender. And because of that risk they are going to charge you more interest," explains millennial money expert Stefanie O'Connell. "One of the most effective things you can do to save money in the long term on something like a loan, is to improve your credit score." If possible, choose your lender before filling out an application, because multiple pulls of your credit report can harm your credit rating.
Some loans have an upfront fee called an origination fee that is either collected at loan closing or financed into the loan; others will simply charge a suitable rate that covers their costs without the need for an origination fee. As you check out loan alternatives, be sure to compare all fees and annual percentage rates (APRs) to calculate costs over the life of a loan. This is especially important when comparing different types of loans or traditional versus non-traditional lenders.
With more traditional online loans, you pay the same amount every month over the term of the loan — although some lenders offer you a choice of the length of the loan, which allows you to modify your monthly payments. Online-only banks may be able to offer you a better rate than the online operations of traditional banks thanks to lower overhead, but that may come at the cost of available customer service.
Looking for alternatives to traditional loans online? Here are a few alternative personal loan options:
- Peer-to-Peer Loans – Peer-to-peer lending sites do not loan the money to you directly; they connect you with individual lenders who are willing to loan you money and perhaps offer greater flexibility on the terms. Peer-to-peer lenders can sometimes offer better rates because of the lack of overhead compared to a traditional bank or credit union, and they may also be more willing to overlook blemishes on credit ratings. However, like any other lender, you must still show evidence that you will repay the loan — and it may take more time to find a lender that is willing to fulfill your loan request.
- Lines of Credit – Lines of credit are unique in that you only borrow money from the line of credit as you need it, much as businesses do to manage cash flow and payroll functions. They may be secured or unsecured. The most common version is a secured home equity line of credit (HELOC) that allows you to borrow against the equity in your home. You only pay interest on the amount that you borrow. However, you are still putting an asset at risk and the rates and terms of a HELOC are not always preferable to alternatives.
- Secured Personal Loans – A secured personal loan may be the only choice if your credit is low, and it may be a reasonable choice in other cases just to receive a lower rate. Banks can offer their customers loans using their liquid assets (deposits, CDs, or money-market funds) as collateral.
- Payday Loans – Payday loans are generally for smaller amounts of money than typical online loans, and are repaid in shorter periods of time in a single lump sum. Because of the higher risk of non-payment, the interest rates are extremely high – often in the hundreds of percent when expressed as an annual percentage rate (APR). Payday loans may express their interest in monthly or even weekly terms to obscure this fact. In general, online payday loans should be the very last resort.
Before applying for an online personal loan, make sure that you thoroughly check the terms and conditions as well as the rates. List all the questions relevant to your situation prior to your search. Examples: Does the lender offer the amount of money you need at a reasonable interest rate? Are there excessive fees, prepayment clauses, or other unusual potential charges? Is the loan's interest rate fixed or variable? How soon will you have access to your money? What are your customer service options? How are late payments handled? Are the terms better than you could receive on a promotional credit card or other credit alternative?
Finally, before you fill out an application, research the lender outside of their website to verify that you are dealing with a legitimate lender. Look for Better Business Bureau (BBB) ratings and lender information from the Federal Trade Commission (FTC). Check online reviews of the lender's performance. After a thorough vetting, you can fill out your application with confidence — and thanks to online loans, you don't even have to get up out of your chair to do so.
If you are interested in a personal loan, visit our curated list of top lenders.