Whether you’re facing an unexpected emergency or need help financing a major purchase, a personal loan can get you the cash you need. Traditionally, when you needed money, you would visit your local bank or credit union for a loan; while this is still an option, more and more people are turning to online lending for its convenience, ease, and how quickly funds can be distributed once an application is approved.
Although online banking has been around for many years, online loans have been slower to develop for a variety of reasons. From horror stories regarding predatory payday loans to security concerns, many people are still wary of online lending.
We’ve decided to publish this article to walk people through the ins and outs of online installment loans to bring transparency to the often-confusing business of online lending. In this guide, we will:
- Define and explain the history of online lending
- The various reasons people apply for online loans
- The different types of online loans
- The advantages of choosing an online lender over traditional banks or credit unions
- How to identify and avoid predatory lenders
- How to find a trustworthy lender
Online Lending: A Brief History
Online lending was born in 2006, when the first lender realized it could leverage the internet and data analytics to offer loans directly to consumers who may not be able to obtain credit from traditional financial institutions. Online lenders today use lead generation technology to efficiently find borrowers who are searching for loans, and “big data” analytics to quickly and cost-effectively process and underwrite prospective borrowers to evaluate risk.
Let’s take a more detailed look at the advantages of online lending over traditional brick-and-mortar banks:
|Online Lenders||Traditional Banks|
|Often no overhead associated with retail locations means online lenders can offer smaller loans with shorter durations and fewer fees without charging high interest rates or fees||Have to lend in larger amounts, as well as charge fees (e.g. service fees, closing fees) in order for a loan to make financial sense|
|Access to sophisticated data helps online lenders answer alternative, more detailed questions about a borrower’s candidacy for a loan||Sole determinant for assessing whether or not a potential borrower is a good candidate for is FICO®|
What Are Online Installment Loans?
Online installment loans are personal loans that are offered through a website or other internet-based platform. A personal loan is money borrowed from a lender that is paid back in regular payments, or installments (which is why these loans are also known as installment loans), over a defined period of time which can range from several months to several years. Some personal loans are acquired for a specific purchase, but most of the time a personal loan can be used for just about any purpose.
Personal loans are also unsecured loans. This means that there is no collateral associated with a personal loan (e.g. with an auto loan, the car that you buy is the collateral, which can be repossessed by the lender if the borrower defaults on the loan).
What Are the Advantages of Online Installment Loans?
There are many reasons for the continued growth of the online lending industry. Taking out a personal loan can be less expensive than other forms of credit, and when you opt to get a personal loan online, there are even more benefits. Here are some of the major advantages for borrowers who choose to get a personal loan online:
Online lenders allow you to complete the entire application process through their website. Being able to apply for an online loan from the comfort of your own home saves you valuable time and having to take a trip to the bank.
Quickly compare options
Shopping online for a personal loan makes it easier to compare lenders and loan options. This can help you get the best rates and loan terms for your unique financial situation and desired loan amount.
Although many traditional, branch-based banks allow you to begin the application process online and upload required verification documents (e.g. your driver’s license or pay stub), many also require you to complete final paperwork at an actual branch location. It also often takes a long time for someone to review and respond to your application. When you apply for an online loan, you’ll get a faster approval decision, usually within minutes.
Easier approval for those with poor credit
Unless you have great credit, it is hard to get a loan from a bank or credit union as they only use a standard FICO score. Online lenders are more likely to approve borrowers who don’t have what is traditionally thought of as “good credit” – maybe because they are working on building their credit, or have fallen on hard times. This is because they use alternative data to evaluate your creditworthiness (e.g. credit bureaus that specifically serve the subprime market, utility payment history, and even information from your social media accounts).
Fast funding process
Not only is the application and approval process quick and easy, but most lenders can also deposit your funds directly into your bank account, often by the next business day and sometimes on the same business day.
As we mentioned previously, most online loans are unsecured, meaning that no collateral must be pledged in order to be approved, and that borrowers do not run the risk of having to forfeit property if they default on the loan.
Prequalify without hurting credit
Some online lenders allow you to apply for prequalification with a soft credit inquiry, which will not appear on your credit report and will not impact your credit scores. This means that you may be able to submit multiple prequalification applications to different online lenders in order to make the best decision when you are shopping for a personal loan.
Why Take Out a Personal Loan?
There are many circumstances that make taking out a personal loan a smart move. Let’s explore some of the reasons you might want to take out a personal loan:
Consolidate high-interest debt
Taking out a personal loan is a great way to combine your debt into a single monthly payment. This makes it easier to keep track of instead of having to remember a variety of different due dates, addresses, payment amounts etc. What’s more, the interest rate on your new loan can have a lower interest rate than your existing debt, which would enable you to pay off the debt faster.
Home improvement and repairs
Personal loans are an ideal option for those wishing to embark on a home improvement project to add value to their home. A personal loan is a great alternative to racking up credit card debt or having to pledge your house as collateral as you would if you took out a home equity loan.
It is also a good idea to save money for unexpected home repairs. A great rule of thumb is to set aside about 1 percent of the purchase price of your home each year. For example, if your home is worth $200,000, you should budget about $2,000 per year for emergency repairs. Unfortunately, many people do not have these kinds of emergency cash reserves. Emergency repairs are just that, and if you don’t have the funds to fix something like a leaking roof, it can quickly snowball into other problems (e.g. drywall and moisture damage), further hiking up the price of repairs. If you’re facing an unexpected emergency home repair but don’t have the cash you need, a personal installment loan can help you address the issue and repair your home as quickly and easily as possible.
Unexpected medical expenses can happen to anyone, and often happen at the worst financial time possible. To make matters worse, those who do not have health insurance have the burden of figuring out how to pay the full amount of their medical costs. This situation can result in serious debt or even bankruptcy. Online personal loans offer quick and easy financing options that can be used to cover the costs of expensive medical bills over time. If you’re dealing with multiple medical bills, a personal loan would enable you to consolidate your payments into a single monthly installment payment that is easier to track, helping you satisfy your debt quickly.
Emergency vehicle repairs
When your car breaks down unexpectedly, it can quickly affect every area of your life. According to the U.S. Bureau of Labor Statistics, the costs of motor vehicle maintenance and repair experienced an average inflation rate of 2.69% per year; this significant inflation means that auto repairs that cost $500 in the year 2000 would cost $828.28 in 2019. While building an emergency fund for unexpected car repairs would be ideal, as it would be for any other potential emergency, it can be difficult or impossible for many people to set this amount of money aside. If you can’t afford necessary repairs to your main form of transportation, an online personal loan can get you the cash you need to get you back on the road as soon as possible.
Financing a major purchase like a wedding or buying a new car with a personal installment loan can help you save a considerable amount of money on the interest charges that you would incur if you chose to use a credit card. You could also use the proceeds from your personal loan to pay sellers in cash instead of financing through the seller to get a better deal on your major purchase.
How to Avoid Predatory Lenders: 4 Red Flags
With storefronts all over the country and scores of websites offering short-term payday loans, most people are familiar with this type of lender. Research shows that each year, twelve million Americans take out payday loans, spending a staggering $9 billion on loan fees.
The promise of fast cash for people with poor credit makes payday loans an alluring alternative to traditional loans. But these high-cost, small-dollar, short-term loans carry exorbitantly high interest rates and have short repayment terms, making them difficult for borrowers to repay.
Payday loans are notorious for trapping financially vulnerable borrowers on these treadmills of debt, making them a dangerous source of fast cash. Bottom line: payday loans are never safe.
If you’re looking for quick cash from a trustworthy lender, watch out for these five red flags that will quickly help you identify a predatory payday lender.
1) Guaranteed approval.
Lenders are not in business to lose money, so they cannot guarantee that they will lend to anyone. While some reputable lenders are willing to take higher risks, they still require some financial information and will insist that at least some underwriting standards be met, before they will offer approval.
Predatory lenders, by contrast, make the entire online process suspiciously easy—apply by providing proof of income, a valid ID, and your checking account information, and funds will be instantly deposited into your account. Anyone can apply and everyone is approved for these deceptively easy online loans. If it sounds too good to be true, it’s because payday lenders have a strategy that allows them to earn high profits for taking big risks at the expense of the borrower.
2) The name game.
Payday loans have a bad reputation, but they still know that first impressions are important. Predatory lenders are always looking for loopholes to circumvent laws that inhibit their operation. For example, some payday lenders will get licensed as mortgage lenders, which operate under different laws. In this way, they can offer loans that they call mortgages, but that look and behave like payday loans.
Other deceptive marketing tactics these lenders employ include using semantic terms for “payday loan” such as:
- payday advance
- cash advance
- bank deposit advance
- deferred deposit loan
It’s all smoke and mirrors. Regardless of what they call themselves or their loans, if a lender is offering you a payday loan under another name, you are dealing with a predatory lender.
3) Short terms, high risk.
A trademark of all payday loans, very short terms are one of the biggest red flags that you’re dealing with a predatory lender. Designed to coincide with standard pay periods, the terms of payday loans are typically fourteen days to one month. In the event that you fail to pay off your payday loan by the time you receive your next paycheck, the lender will automatically take the funds from your checking account.
You assume more risk when you agree to the short terms associated with a payday loan. Although you might be able to repay the amount of your loan and the additional fees and interest, research shows that most borrowers are unable to satisfy their payday loan by the given due date. Short terms may make it seem like you’re getting a quick loan that only lasts a couple of weeks, but most enter an ongoing cycle of debt, struggling for months to repay their lender.
4) The rollover “opportunity”.
When a borrower is unable to pay off their loan within the term period, payday lenders often offer to renew, or “rollover” the loan, essentially extending it for two more weeks. This concept may initially sound appealing, but as with any other seemingly attractive feature of payday loans, it comes with strings attached—payday loan rollover means that another round of fees are tacked on to your newly extended loan.
This is how borrowers take their first lap on the infamous payday loan “debt treadmill.” The combination of short terms and high interest puts borrowers on a slippery slope, digging them into a deep financial hole that makes it next to impossible to get ahead of the money they owe.
These red flags are what you should look out for when you suspect that you might be dealing with a predatory lender, either online or in a store. If you’ve confirmed that you’re being offered a payday loan, consider an alternative source for the emergency funds you need.
How to Find a Trustworthy Lender
Knowing how to choose a legitimate, reputable online lender is the best way to prevent most potential problems. You should always perform thorough research on online lenders you are considering for both positive and negative reviews from trustworthy sources. Ask friends and family if they have worked with an online lender with whom they’ve had a positive experience, and consider consulting financial advisors for referrals. The better your source, the more confident you can be when borrowing from an online lender (and the less likely you will be to get stuck in a financial hole).
You should also evaluate the lender’s website—a crude website full of typos and misspelled words and errors might be a sign that you have found an untrustworthy, fly-by-night lender. It is also important to ensure your sensitive personal information is protected; if you encounter any security errors when visiting a potential lender’s site, not only are you likely dealing with a predatory lender, it could also leave you vulnerable to identity theft.
A Better Way to Borrow Cash
Life happens fast, and whether you need to fund a major planned purchase or need money to cover an unexpected expense, Uprova offers a simple, secure, confidential way to get the cash you need, when you need it.
Uprova was founded on the belief that everyone should have access to safe and affordable online lending options regardless of their credit score. We provide fast access to the funds you need at a reasonable rate with repayment terms that work for you. Our personal installment loans range from $300 to $3,000 and help build your credit with on-time payments.
Our goal is to help you achieve financial freedom while still providing the fast cash you need. At Uprova, we value all borrowers, and aim to provide an equal opportunity for those with bad credit, fair credit, good credit and borrowers with no credit history to enter the lending market without having to worry about falling victim to predatory practices.
Uprova brings accountability and transparency to online lending, helping each and every borrower create their own path to financial health. Our application process is fast, easy, and secure. Get started and apply today to check your rate without impacting your FICO credit score!
Want more information? We are here to help! To learn more, contact our team of professionals today.