Edited by Michelle TipswordHow Do Online Loans Work?
Quick Answer
Online loans let you borrow money without stepping foot in a bank. After prequalifying online, you can complete an application, upload documents and wait for approval—all from your computer or mobile device.
Online loans let you borrow money without visiting a physical bank branch or lender. Instead, you can complete the process from start to finish from the comfort of your home. If you prefer online banking, getting an online loan may be an attractive option. However, you may not get the same level of personalized customer service that you might get with a traditional lender.
Below, learn more about online loans, how they compare to traditional loans and the steps you can take to get one.
What Is an Online Loan?
Online loans are like traditional loans, but the entire lending process happens online. Often, online loans refer to unsecured personal loans, but there are other types of online loans. Certain lenders operate solely online and specialize in this type of loan. But some traditional banks offer online loans too.
Online personal loans work similarly to traditional loans. You apply, submit any necessary documentation and wait for the lender's approval. If you're approved, the lender will disburse your funds. Finally, you'll start repaying the loan with regular monthly installments. With online loans, all of these steps happen digitally.
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Online Loans vs. Traditional Loans
Both online loans and traditional loans can provide you with much-needed cash, but everything from how you apply to your interactions with customer service may differ.
Here's a summary of how online and traditional loans compare:
- Application: Online loans have streamlined, digital applications that don't require an in-person appointment. Because applications are designed for online completion, they're generally easy to complete and user-friendly.
- Prequalification: Many online lenders allow you to prequalify in minutes, letting you compare offers from multiple lenders.
- Documentation: Both online and traditional loans require you to provide documentation that helps them verify your identity, address, income and employment situation. These will usually include your driver's license, pay stubs, Social Security number and more. With an online loan, you'll be able to upload and verify these documents digitally. Some online lenders even streamline the process by verifying your income using your bank credentials. Traditional lenders may allow you to bring these physical documents to a bank branch.
- Interest rates and fees: The cost of borrowing varies from lender to lender, regardless of whether they operate online or in person. However, online lenders may be able to offer lower rates due to their lack of overhead expenses.
- Customer service: Traditional loans may offer more ways to get support, including meeting a loan officer in person. Online lenders are generally only available by chat, email or phone.
| Online Loans | Traditional Loans | |
|---|---|---|
| Application process | Completely online; usually streamlined for efficient, user-friendly experience | May require an in-person appointment |
| Prequalification | Prequalify online in minutes to easily compare loan options | Some lenders may offer online prequalification |
| Documentation | Securely upload necessary documentation or share bank credentials for income verification | May let you bring physical documentation to branch |
| Interest rates and fees | Varies by lender; some online-only lenders may be able to offer lower rates due to lower overhead costs | Varies by lender |
| Customer service | May be available by phone or online | Often available online, by phone or in person |
Pros and Cons of Online Loans
In an age of digital banking, online loans are a convenient alternative to traditional loans. But it's worth weighing the pros and cons before deciding whether or not they're right for you.
Pros
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Prequalification: Prequalifying for an online loan usually only takes a few minutes. Plus, it gives you a more accurate idea of how much it'll cost to borrow, making it easier to compare rates between lenders. Shopping for a loan online allows you to compare multiple lenders easily, especially if you're using an online comparison marketplace.
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Ease of applying: You don't need to visit a bank branch or make an appointment to get a loan. Instead, you can apply online whenever and wherever you want.
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Potential for lower or fewer fees: Some lenders operate exclusively online, lowering their operating costs. In some instances, online lenders pass these savings on to customers in the form of rate discounts or fewer fees.
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Efficiency: Because online loans are designed for online borrowers, applications are typically streamlined and efficient. Funding can be fast too—sometimes as quick as one day.
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More options for bad credit: If you have bad credit, it may be easier to find a lender online than in person. That's because you can narrow your search based on credit requirements instead of geographic availability. Some online lenders even focus on lending to borrowers with bad credit.
Cons
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Scammers may be more prevalent: Without a physical presence, it can be harder to differentiate legitimate online lenders from fraudulent ones.
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More financial accounts: If you go with an online lender, this may require you to open an account with an additional financial institution (as opposed to getting a loan with the bank you already use).
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Limited customer service: Without a branch to visit, getting customer support may be harder. You'll have to rely on email, online chat or the phone to get your questions answered.
How Fast Can I Get an Online Loan?
One advantage of working with online lenders is that you can compare loans, prequalify with multiple lenders and submit an application relatively quickly. This can be advantageous when an emergency happens and you need cash as soon as possible.
Funding times for online loans can also be fast. Some online lenders can even fund your loan the same day you apply. Traditional lenders, meanwhile, may take several days to fund your loan after approval. Regardless of the type of lender you choose, the process can take longer if your application includes errors or you don't have all the documentation you need handy.
Can I Get an Online Loan With Bad Credit?
Some online lenders focus on lending to people with bad credit or a limited credit history.
Still, the lower your credit score and income, the more difficult it may be to qualify for an online loan. And if you do get approved, you may receive a higher interest rate or lower loan amount. Unless you need the money for an emergency, it may be worth improving your credit before taking out a personal loan.
If you need cash now but bad credit is hindering your options, consider other ways to borrow. For example, you may be able to get a loan from a friend or family member. Or, if you have a close friend or relative with good credit, you could ask them to cosign a loan for you. Just make sure you choose a lender that accepts cosigners.
Are Online Loans Safe?
There are plenty of reputable and trustworthy lenders, both online and with brick-and-mortar locations. However, borrowing money online can present unique opportunities for scammers, as lenders never have to meet you face-to-face.
To make sure an online lender is legit, do some basic research before contacting them. Search third-party sites like Trustpilot and the Better Business Bureau for customer ratings and reviews.
These testimonials can give you insight into what it might be like to work with the lender. Even if a company is legitimate, you don't want to be stuck paying back a loan to a company that has poor customer service.
With any lender, keep an eye out for fraudulent behavior. For example, beware of lenders that approach you with a loan offer or guarantee approval regardless of credit or income.
Finally, be cautious about taking out a loan with an extremely high interest rate. For reference, personal loan interest rates generally range from 6% to 36%, and the average rate (for a 24-month term) was 11.14% in August 2025, according to the Federal Reserve.
How to Apply for an Online Loan
Applying for an online loan is similar to applying for a traditional loan—the only major difference is that you're doing it all digitally. Here's how to get an online loan:
- Get prequalified. Compare a variety of lenders and prequalify where possible. Prequalification helps you estimate borrowing costs with only a soft credit inquiry, which doesn't impact your credit score. Typically, this process takes just a few minutes online.
- Compare your options. With prequalifications in hand, compare your offers. Consider potential interest rates, fees, loan terms, rate discounts and funding times when weighing your options.
- Submit an application. Once you've decided which lender you're most interested in, submit a formal application. This often involves providing ID, contact information, employment and income information, your housing status and desired loan amount. When reviewing your application, the lender will also perform a hard credit check.
- Review terms and accept your loan. If the lender accepts your application, you'll receive loan terms to review. Make sure everything looks right before signing the agreement. Finally, the lender will disburse your funds. With online loans, funds are often delivered via direct deposit into your chosen bank account, though you may be able to opt for a check.
The Bottom Line
Online loans are a convenient alternative to visiting a lender in person. They can save you time, make prequalification a breeze and sometimes offer competitive rates. Some online lenders even cater to borrowers with bad credit.
While there are many legitimate online lenders, keep an eye out for scams too. Guaranteed approval and loan solicitation are common signs of potentially fraudulent lenders.
Ready to start shopping for an online loan? Use Experian's loan comparison tool, which can help you find and sort online lenders based on your credit profile and borrowing needs.
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About the author
Emily Batdorf
Emily Batdorf is a finance writer based in northern Michigan. She specializes in topics including budgeting, banking and debt payoff, leveraging her education background to break complex topics into approachable content.
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