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Personal Loans

How Do Online Loans Work?

Online loans let you complete the entire borrowing process, from prequalification to loan funding, without ever setting foot inside a bank branch. They can be a convenient way to borrow money, and online-only lenders could offer lower rates or have less stringent requirements than you can find with traditional lenders.

What Is an Online Loan?

An online loan can come from either an online-only lender or the online department of a more traditional lender. Often, these are unsecured personal loans, but you can get other types of loans online as well.

As with more traditional lenders, each online lending company has its own minimum eligibility and credit requirements. You can generally check to see if you prequalify for a loan with a soft credit inquiry that doesn't impact your credit scores.

However, you may need to agree to a hard credit inquiry, which may hurt your scores a little, to complete an application. You'll also need to upload verification documents, such as a copy of a government-issued ID to prove your identity and pay stubs or tax returns to prove your income. If you accept a loan offer, you can have the money deposited directly into your bank account.

What Is the Difference Between an Online Loan and a Traditional Loan?

Today, many traditional lenders also offer loans and loan servicing online. But there are still a few distinctions that could make online-only lenders more (or less) attractive based on your preferences.

  • No in-person contact: The most obvious difference is that there's no way to interact with a customer service representative or banker in person when you work with an online-only lender. If you have questions or concerns, you'll have to address these online or over the phone. This may be a good or bad thing depending on your comfort level dealing with finances online and whether you live close to a bank branch.
  • Quick applications and reviews: Online-only lenders may focus their resources on creating simple and automated systems that can help streamline the application and review process. And the lender may be able to use a program to quickly verify everything without having to get a person involved.
  • Targeted loans: Many online lenders only offer one or two loan products, and they create these with a specific type of borrower in mind. You may be able to find an online lender that specializes in people who have poor credit and another that specializes in loans to those with excellent credit.
  • Potential savings: Because online-only lenders don't need to build, maintain or staff branches, they may be able to offer lower rates on their loans. However, this isn't universally true, and you'll want to check rates from both online and traditional lenders before applying.
  • Less cross-selling: One reason traditional lenders may offer loans with low rates is that they can make money by selling you other products or services later, such as a bank account or auto loan. When you work with an online-only lender, you might not have to deal with as many offers to sign up for other products.

Whether you want to work with an online-only lender or a traditional lender, you can look up their minimum requirements, loan offerings, interest rate ranges and potential repayment terms to determine which lenders may be a good fit.

How Fast Can I Get an Online Loan?

When an emergency strikes, you might not have a lot of time to compare lenders and wait for the funds to arrive. One advantage of working with online lenders is that you can quickly submit multiple prequalification applications to find the best rates and terms without hurting your credit.

A few online lenders offer same-day funding once you're approved. But generally, it can take around one to five business days to get the money once your loan is approved. In part, the timing can depend on which bank you use. Some lenders may also take several days to review and approve your application, and the process can be delayed if you're delayed in uploading the required verification documents.

Traditional banks and credit unions where you have an account may be able to get the money into your account the same day you're approved. They may, however, take longer to process and review loan applications, and some financial institutions don't offer personal loans at all.

Can I Get an Online Loan With Bad Credit?

Some online lenders focus on lending to people who have bad credit or are new to credit. But even then, you may need a credit score in the mid-500s to low 600s, which could put you in the high end of the "very poor" to the "fair" credit score ranges.

The lower your score and income, the more difficult it may be to qualify for a loan. And, if you do get approved, you may receive a high interest rate (sometimes much higher than credit cards tend to charge) and low loan amount. Unless you need the money for an emergency, you may want to focus on improving your credit before taking out a loan. Check your credit score and credit report to see where your credit stands and where you can improve.

You could also look for less formal ways to get the money, such as a loan from a friend or family member or crowdfunding. Or, if you have a creditworthy close friend or relative, you could ask them to cosign a loan for you.

How Safe Are Online Loans?

There are many reputable and trustworthy online-only lenders and traditional lenders that offer online loans. However, you also want to be cautious of scammers. Some signs of a scam include someone reaching out to you to offer you money and guaranteeing you'll be approved regardless of your credit or income.

You can look up companies by searching for third-party reviews and seeing if the business has a Better Business Bureau rating. The reviews and complaints can also give you insight into what it might be like to work with the lender. Even if a company is "safe" in the sense that you'll receive a loan, you don't want to be stuck paying back a loan to a company that has poor customer service.

Additionally, be cautious about taking out a loan that has an especially high interest rate, such as 60% to 200% APR. Although online lenders are allowed to offer term loans with these high rates in many states, and they (accurately) advertise they're cheaper than payday loans, these high-rate installment loans can still be costly and difficult to repay.

Check Your Personal Loan Offers Before Applying

If you want to easily compare lenders and loan offers, you could start by using Experian CreditMatchTM. Based on your credit profile, Experian can match you with personal loan offers from its partners. You can also sort and filter the results depending on how much you want to borrow and your preferred repayment terms.

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