With online personal loans, the entire loan process — from pre-qualification to signing — happens online. These loans are typically unsecured, and your credit score, income and debt heavily determine whether you qualify. Approved borrowers receive loan funds in a lump sum and pay back the loan in fixed monthly installments over the loan term, typically two to seven years.
Online loans can be used for almost any purpose, including emergencies, home repairs or debt consolidation. Loans are available for borrowers across the credit spectrum, but interest rates may be higher for borrowers with lower credit scores. Financial experts recommend an annual percentage rate below 36% for a loan to be affordable to a borrower.
Some online lenders offer features like flexible payment dates, an option to refinance an existing personal loan or the ability to add a co-borrower. Consider and compare loan features when shopping for an online loan.
Pros and cons of online loans
It’s a good idea to weigh the pros and cons when deciding whether to go with an online lender versus an in-person lender like a bank or credit union. Certain features may vary from lender to lender, but here is generally what you can expect with online loans.
Pros
Convenience: You can complete the entire loan process from your computer or, in some cases, your phone. The best online lenders also have mobile apps you can use to manage your loan during the repayment term.
No-risk estimates: Most online lenders let you pre-qualify within a few minutes and preview estimated rates without impacting your credit score. (All lenders require a hard credit check before you finalize a loan.)
Quick and simple shopping: Since each online lender uses its own underwriting formula, the rates can differ between lenders. Comparison websites allow borrowers to fill out one application to see loan offers from multiple lenders. This is easier than banks or credit unions that may only service loans in person or require you to visit a branch during the application process.
Debt help: With some online lenders, borrowers can opt to have the loan money sent directly to creditors with a debt consolidation loan, removing the burden of paying off individual credit cards.
Cons
More expensive than credit unions and some banks: On average, loans from online lenders are not as cheap as those from credit unions. And if you already have a relationship with a bank, it may offer you lower rates than online lenders. Compare rates from multiple lenders online and offline before you take out an online loan.
No face time: Some online lenders have physical locations, but many only service loans digitally. This can be a challenge if you ever want to speak to a representative face-to-face.
Smallest loans not available: Online loans under $500 may be hard to find at rates below 36%. Many online lenders have loan minimums from $1,000 to $2,000. Some credit unions may be able to provide smaller loans starting at $250.
Predators lurk: Reputable online lenders compete alongside predatory online lenders. Reputable lenders check your credit and ability to repay, and they usually have APRs that top out at 36%. Predatory lenders typically don’t check credit, but you pay for the added risk with APRs well above 100%.
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