Have you ever needed a personal loan, but didn’t want to go through the hassle of applying through a bank? Online loans are for people who need funds as soon as possible. But is this the right choice if your priority is finding high-quality finance at competitive rates? Online loans are fast, but how do they compare by way of interest rates and fees? Let’s look at the differences between banks and online lenders.
What Is An Online Loan?
Before the year 2000 there was no such thing as an online loan. Both lenders and applicants found the process cumbersome. When online loans first became available, they were a game-changer. It meant a lender had access to all the information they needed to make a lending decision within a matter of minutes. By also eliminating manual calculations and form filling, loans could be approved and paid out within hours.
What Makes Online Lending Faster?
Nowadays, everything is geared toward making the loan process as fast as possible. Answer a few questions online and upload a photo ID. Then the loan company will send you a link that authorizes them to view your statements. Your application can be assessed without you having to send them bank statements. Since the process is so finely tuned, a personal loan can be approved on the same day.
Is An Online Loan More Expensive?
An online loan is an alternative to traditional bank lending. Many people think that banks offer the best rates on personal loans, but that isn’t necessarily the case. In some cases, the opposite is true.
1. Online Loans can work out cheaper
A website review of personal loan rates from New Zealand’s largest banks found rates ranging from 13.90% to 18.95%. In contrast, NZ loan company Loansmart offers rates as low as 8.95%.
2. Interest rates are tailored to you
Why does this matter? You can find the personal loan rates offered by banks online. It’s pretty much a one-size-fits-all approach, even if some offer lower rates for students and homeowners. So if you’ve got a good credit score, and good discretionary income, you might end up paying more through a bank.
3. You could borrow a larger amount online
Banks typically offer up to $30,000 for unsecured loans, but online lenders can offer up to $50,000. That extra $20,000 can make all the difference if you’re renovating, buying a car or consolidating loans.
How to Avoid Online Loan Mistakes
So, if online loans are faster, easier and sometimes cheaper than bank loans, there must be a catch, right? Because online lenders vary so much, you have to do your homework before choosing a loan company. Listed below are a few things to consider before submitting an online loan application.
Check The Fees
There is a difference between Interest Rates and Annual Percentage Rates (APR). Annual percentage rates take into account fees as well as interest, so they provide a true reflection of loan costs. Compare loan repayments over the same period, and with the same loan amount for a like for like comparison. Make sure you’re looking at the annual interest rate, not the daily interest rate, as many lenders advertise the daily rate instead. If a loan company advertises a daily rate, it could indicate a very high annual rate. Online loan calculators can provide a good indication of what your repayments could be.
Make Sure The Lender Is Low Cost
Some lenders, notably payday lenders, advertise daily interest rates, which appear really low, but can be higher than 50% per annum. You could end up paying double the amount you borrow through a payday lender. Lenders who do not show their interest rates are likely to be high-cost lenders, which brings me to my next point.
Look For Social Proof
Be careful when applying for loans online because each time you do, your credit score can suffer. You may be viewed as living beyond your means when you apply for multiple loans. You want to work with a loan company that is fair, affordable, and highly regarded. A declined application will also hurt your credit score, so it’s best if there’s a good chance they’ll say yes. Look for social proof – what are other people saying about them? You can learn a lot about Loan Companies by checking out independent third party websites like Google Business Profile. Take time to read comments – how are they rated for helpfulness, communication, solutions, interest rates and loan costs?
Get on the phone and see what solutions they can provide before you apply. Apply if you’re comfortable with their current interest rates, loan terms, and are fairly confident you’ll be accepted (pending a credit check and review of your bank statements).
Personal loans have come a long way in the last couple of decades. Borrowers today have many options, and getting a loan online might be a better option than going to a bank. Ultimately, it depends on how much the loan will cost. Banks can be perceived as being cheaper than online lenders, but comparing fees and interest rates shows that’s not always the case. Banks tend to offer one rate to all borrowers, which can be considerably higher than the starting interest rate of online lenders. Ultimately, it’s important to pick a lender with a good reputation and many years of experience. In addition, it’s imperative they offer lower interest rates and fees, so you don’t end up paying more than you should.