Loan features vary across online lenders, but you’ll generally encounter these pros and cons with online loans:
Convenience: With online loans, you can complete the entire loan process — from pre-qualification to signing — from your computer or, in some cases, your phone. Some banks offer an online loan option, but you typically must visit a branch to complete the application.
No-risk estimates: Most online lenders allow you to pre-qualify and see estimated rates without committing to a loan or affecting your credit score. Banks and credit unions typically require a hard check for this preliminary step. (All lenders, whether online or brick-and-mortar, typically require a hard credit check before you finalize a loan.)
Credit plus more: Online lenders look at more than your credit score and credit report when making an approval decision — they may consider your education or occupation, or ask to scan your bank account transactions to assess your financial behavior. This can improve your chances of getting a loan if you’re new to credit or have a low score.
Quick, simple shopping: It’s easy to compare rates from multiple lenders: Online pre-qualification takes a few minutes, and comparison sites allow borrowers to see loan offers from multiple lenders after filling out a single application form. You can do this on NerdWallet’s lender marketplace.
Debt help: Some online lenders allow borrowers who take a loan to consolidate debt the option to send money directly to creditors, improving the chances of successfully paying off debt.
Costlier than credit unions and some banks: On average, loans from online lenders are not as cheap as those from credit unions. Since each online lender uses its own underwriting formula, you may get different rates from each one. If you’re an existing customer at a bank that offers personal loans, that bank could offer you a lower rate as well. It’s essential to compare rates from multiple lenders before you take an online loan.
Sometimes not so simple: The application process for some types of personal loans — including secured and co-sign loans — can be more complex than that for unsecured personal loans, where approval is based largely on income and credit history.
Large loans only: Loans under $500 may be hard to find at rates below 36%. Most online lenders have loan minimums of $2,000. A local credit union, while not as immediate, is usually the best place to look for small loans.
Predators lurk: Reputable online lenders compete alongside predatory online lenders. Reputable lenders check your credit and ability to repay the loan, with annual percentage rates that top out at 36%. Predatory lenders advertise that they don’t look at credit. You pay the cost of this added risk, in the form of APRs that can top 400%.
Online personal loans vs. payday loans
Payday loans are quick ways to get a small amount of cash — usually less than $1,000 — and you don’t need good credit to get one. But payday loans are expensive, and the companies that offer them usually prioritize their own profits over consumers’ interests, charging triple-digit interest rates and fees for late payments.
Many payday loans have repayment periods of two weeks to a month. If you fail to pay the loan back on time, the lender may withdraw money directly from your account, potentially incurring overdraft charges on top of the lender’s late fee.
If you’re looking for a small loan, online personal loans are less expensive, even if your credit is bad. Many can fund a loan for as little as $1,000 on the same business day that you apply for it.
How much will an online loan cost?
The rate you receive on an online loan depends a lot on your credit score and debt-to-income ratio. The better your score, the lower your rate and the less interest you’ll pay over the life of the loan. The interest rate also affects your total monthly payment, as does the term length; a longer term means lower monthly payments, but more interest.
How’s your credit? Many online lenders consider additional factors, such as your education history or profession, but in conjunction with your credit score and credit history. If your score is average or poor, it’s worth taking steps to build your credit.
Is the APR below 36%? The sum of the interest rate and all fees is known as the annual percentage rate, and the APR you receive largely depends on your credit. Financial experts and consumer advocates agree that 36% APR is the acceptable limit for a loan to be affordable to a borrower. If an online lender offers rates above 36%, that’s a sign the loan is unaffordable, even if the monthly payment fits your budget.
Is your documentation ready? You can easily get rate quotes by providing your name, date of birth, the last four digits of your Social Security number and other information you enter from memory, but once you decide to move forward with an application, lenders will require documentation, including a form of identification and proof of income, such as a pay stub or W-2. You’ll upload the documentation electronically; many lenders accept screenshots or phone photos in addition to scanned documents or PDFs.