The pros and cons of online loans

Lending experiences vary by lender and loan, but you’ll generally encounter these pros and cons with online loans:

PROS:

  • Convenience: With online loans, you can complete the entire loan process — from pre-qualification to signing — from your computer or, in many cases, your phone. Some banks offer an online loan option, but you 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.

CONS:

  • Costlier than credit unions: 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. 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%.

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