Unlike a traditional loan that requires meeting with a bank representative, online loans take advantage of technology to drive lending. It helps make quicker decisions and more approvals. Yet, online lenders take more risk. To secure themselves, they have to make interest rates higher and repayment terms shorter.
Why Do I Need a Loan?
When taking out a loan, you have to compare all the available loans and choose the best one. To do this, you have to understand why you want to take it out. The majority of people take out loans because they don’t have large sums to pay for big expenses. The most common reasons of securing financing are consolidation debts, buying a car, home improvement, funeral expenses, starting a business, vacation, medical expenses, paying off credit cars, wedding or other special events.
Types of Online Loans
There are several types of loans online based on your needs. They are divided into 2 main categories – secured and unsecured.
Secured loans are the loans backed by collateral. It means that one puts something up (your house, car, or other valuable assets) to give the guarantee of loan repayment. In case you repay the loan, your assets will be seized or forfeited.
Unsecured loans are the ones that aren’t backed by some asset. These quick loans online are supposed to be “higher risk” loans. That’s why they often have higher interest rates.
These two categories include other loan types. Depending on the loan type and whether it is secured or not, the lender will determine the terms of repayment and what happens if you can’t repay it.
Types of secured loans:
• Business loan – can be both secured and unsecured. If you choose secured business loan, you will have to put some asset as a collateral, but the interest rate will be low.
• Auto loan is granted to you in order to help you buy a car over a definite period of time. If you don’t make timely repayments, it will be repossessed.
• Personal loan can also be both secured and unsecured. As a rule, personal online loans for bad credit are secured because the lender takes a big risk.
• Mortgage – your new house/flat is put up as a collateral. If you fail to pay, it can be foreclosed.
• Home equity loan gives you an opportunity to borrow against your home’s equity for a lump sum loan with fixed installment.
Types of unsecured loans:
• Business loan – as a rule, this loan online proposes higher interest rates for a shorter term because they are riskier than the unsecured ones.
• Personal loan – if your credit score is excellent, you can seek for the best online loans with better interest rates and terms.
• Student loan – both private and federal student loans are considered to be unsecured; however, their interest rates and terms are different.
Pros and cons of secured loans
• Build your credit – if you make full payments on time, secured loans can help people with low score build their credit.
• Lower interest rates – a collateral makes lender feel more secure, that’s why he can propose you lower interest rates.
• Better terms – when taking out a secured loan, you get larger loans to cover big purchases.
• Loss of asset – In case of default on your online loan, you may lose your asset (home or car);
• Damaged credit – if you don’t do repayments in time, your credit score will decrease.
Pros and cons of unsecured loans
• Build your credit – unsecured loans can help you build credit as well.
• No risk of assets – these loans do not require a collateral. That’s why you don’t risk losing your car or home;
• Easier application process – it is easier to fill out unsecured loan applications because they don’t require evaluating a collateral.
• Still held responsible – even if your loan isn’t secured, make repayments in time. If not, a lender can sue you in court.
• Smaller loan amount – since your loan is risky, lenders will no be eager to give you large sums.
• Higher interest rates – because of the risk, the interest rates get higher and other fees can be added.
• Damaged credit – if you fail to make timely repayments, your credit score could decrease.
How to Compare Loans
To choose the best option, you should know how to compare loans. It is not that easy to compare loans of all the banks, alternative lenders, credit unions and loan brokers who would like to cooperate with you.
We advise to filter through the multiple lenders according to these recommendations:
- Ask for References
Talk with trustworthy people and ask them about online loans direct lenders they turned to in the past and ask their opinion about them. First ask people, who are informed in financial issues (financial advisers, lawyers, and accountants). Better don’t ask people who get a commission for the recommended products.
- Check Credentials
Ensure that the lender you want to take a loan from is a state-regulated organization. You can turn to Better Business Bureau to check the rating of your prospective lender. BBB cannot provide credit rating for each company. You can also look at the company’s profile and check whether borrowers complain about them.
- Experience is Essential
Better take out a loan from a well-established lender with some experience. Choose the companies that care about the quality of the customer service.
- Check Their Contact Details
Though online lenders provide their services on the web, they need offices anyway. Better don’t turn to small-time lenders that work from basements. The contact details of a lender should contain his address. Keep away from a lender if his office is located in a shady neighborhood or a residential area.
- Read the Loan Agreement Attentively
All the previous recommendations are important. However, nothing substitutes the importance of reading the loan agreement, paying particular attention to the fine print. Ensure that you understand what you are going to sign. Check all the hidden fees like “membership fees”, “application fees” or “pre-payment penalties”. None of them affect the loan APR.
If you want to get the best deal, you have to negotiate. Ask your lender if he wants to reduce some fees or an interest rate. Sometimes they agree on a spot and sometimes propose a compromise. Do not be afraid to ask.
Online lending isn’t a novelty anymore. Doing business online brings higher efficiency and lower costs to the financial institutions.
Choosing online loans gives you important virtues, such as faster approval, a wider range of lenders and instant access to cash. Now you know all the important information about online lending. You see that there are a lot of different types of online loans.You should select the one that fits your needs. When choosing a lender, check its reputation, contact details and read the loan agreement attentively. After this, you are ready to sign and to enjoy the benefits of getting online loans.