Money

The Key Differences Between Online Loans and Bank Loans

The borrowing landscape is undergoing major changes as online loan options proliferate. If you’re shopping for a loan, online lenders are definitely worth a look. Here’s an overview of the key differences you’ll find between online loans and traditional bank loans.

Personal Loans Are More Available Online

In the aftermath of the subprime mortgage crisis (the 2009 economic downturn), many traditional “brick and mortar” banks pulled back on consumer lending. While banks have loosened up a bit in the last couple years, they are still reluctant to offer unsecured personal loans; instead, they are likely to direct such inquiries to their credit card department, because of the double-digit interest rates that credit cards carry. More and more online lenders are stepping in and offering unsecured personal loans that would not be available at a traditional bank.

Online Loan Applications Are Faster and More Convenient

You can apply for an online loan in the middle of the night, from home, in your pajamas. No longer do you have to take time away from work to show up at the bank. Furthermore, many online loan applications don’t require a “hard” credit check. This is helpful to you if you want to take your time in finding the right lender. Too many “hard pulls” on your information from a credit bureau over the course of a year will lower your credit score.

Online Loans Offer Fresh Creative Approaches

One of the most interesting developments as consumer finance has moved online is peer-to-peer lending, such as the loans offered by Prosper, UpStart and Lending Club. This model allows individuals to earn interest by lending money directly to you, within the structure of an online lending platform. You still have to qualify for peer-to-peer loans, but the qualification process is sometimes different (and easier) than qualifying for a traditional bank loan. UpStart, for example, gives borrowers better rates depending on their level of education, and sets loan payments to be a fixed fraction of the borrower’s income. Another creative approach is offered by Vouch, which allows you to get friends and family to co-sign for small segments of your loan. This method allows Vouch to offer loans to borrowers whose credit is not the best.

Online Fees Are Lower, but Some Interest Rates May Be Higher

Because online lenders don’t have to pay the expenses of maintaining a physical bank, they are able to offer lower loan fees. For the same reason, online interest rates are usually also lower if you’re applying for a secured loan, such as a mortgage loan or auto loan.

However, most online lending is unsecured, which means you’re not putting up collateral that the lender can keep if you don’t pay your debt. Unsecured loans are riskier for the lender, so they come with higher interest rates. In many cases, however, borrowing online is your only option if you need a personal loan — and even at a relatively high interest rate, you may end up paying less than you’d pay in credit card interest. One positive aspect of online interest rates is that they are usually fixed, and so you’re not vulnerable to the ups and downs of the national financial markets. This allows you to know exactly how much interest you’ll pay for the life of a loan.

You need to be a careful shopper when working with online lenders: Make sure there’s a phone number and a way to speak with a knowledgeable person if you have questions. Be aware that you should not be asked to pay ahead of time for a quote or pre-approval; a standard application fee is normally charged later in the process. With a bit of care, you can often find an online lender whose innovative approach will open new financial doors for you.

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