How to evaluate an online loan for your needs

Disclaimer: Upstart is not a financial advisor, the following content is for informational purposes only.

Getting a loan online can be a simple way to gain access to funds quickly, with some lenders offering same-day funding once you’re approved. 

Borrowing money, whether it’s from an online lender or your local bank, should not be taken lightly. Defaulting on your loan can negatively impact your credit score and may put you further into debt if you’re not careful. Therefore, it’s important to understand what an online loan entails and what to watch out for before you apply for one. 

Whether you need the money to pay off high-interest credit cards or costly medical bills, here’s what you need to understand and look out for when it comes to online loans. 

What is an online loan? 

Rather than going into a physical location, such as a bank or credit union, online loans can be applied for and completed digitally. A common type of online loan is a personal loan, which is often used to consolidate high-interest debt from credit cards, for example. Personal loans can be used for anything, from funding a wedding to paying off bills. 

The advantage of an online loan is speed and efficiency. 

Speed: By doing everything online, there’s no need to step into a physical location or wait in line to talk to someone. (Note: Not being able to speak to someone may be a benefit or disadvantage, depending on your personal preference for resolving matters that involve your finances. Getting an online loan means if you want to speak to a live person you may need to call a number or chat online on their website. If you are more comfortable talking to a live person face-to-face, a traditional bank or financial institution may be better suited.) 

Efficiency: Online-only lenders may dedicate their resources on creating automated systems through machine learning, for example, to verify your financial documents and streamline the underwriting process. 

Excessively high rates

Payday loans

If you’ve been searching online for a loan, you may have come across ads for payday loans, which are high-cost, short-term loans. Payday loans are considered by many to be a type of predatory lending because of the excessively high interest rates. Some payday lenders charge APRs above 400 percent! Despite that, about 12 million Americans use payday loans

Payday loans typically are targeted to those who may not have good credit or any credit at all and usually for small amounts—approximately $500 or less. The amount that is borrowed is taken out of the person’s next paycheck. 

Personal loans

Stay clear of payday loans because personal loans are a much less expensive option with a lower interest rate. Interest rates for personal loans may vary—the interest rate you are approved for may depend on your credit score, income, credit history, and a number of other factors.

The APR on an online loan should not be higher than 36 percent—this is the maximum rate that has been affirmed by various states and federal agencies. It’s a figure that may give borrowers a fair chance at being able to repay the loan. 

Total amount of the online loan

When you borrow money, there may be certain hidden fees to watch out for that can bring the total cost of your loan higher than the dollar amount and interest rate. Online loans typically have origination fees, application fees, and credit reporting fees. There are also penalty fees, in case you miss a payment or even pay back the loan before the term is over (called a prepayment penalty fee). 

Understanding the total cost, with fees and potential penalties helps prepare you for what you truly owe so you can budget accordingly and set a plan to repay the loan. To help you get a better sense of what to look for, here is Upstart’s list of fees for a personal loan. 

Repayment terms

Your repayment terms will depend on the amount you borrow and how much you can reasonably afford to pay back each month. Watch out for lenders that offer small loans and require you to repay it quickly. For example, with payday loans, borrowers usually are required to pay back the loan within a week or two. 

With online loans, terms may typically be anywhere from two to five years. Look out for terms that seem too long in comparison to the amount you borrowed. Even if the monthly payment is low, you may end up paying more in interest over the life of the loan. 

Lastly, be aware of lump sum payment requirements, also known as balloon payments. This may not be the most reasonable way to repay a loan, especially if you’re already tight on cash.

Lender reviews and reputation

It’s important to do your research on the online lender you choose by thoroughly checking their website, reading case studies, and reviews from real customers. 

See how long the company has been in business and what customers are saying about their level of service and trustworthiness. Do they have satisfied, repeat customers or are they upset because of a lack of transparency and terrible service?

Getting the best online loan

The best online loan will have reasonable interest rates (depending on your credit score), fees, and repayment terms from a dependable lender. Make sure you compare interest rates from various lenders online and shop around to see who will offer you the best rates. 

If your credit score isn’t in the best shape, consider taking a few months to pay off debt and pay your bills on time. Once you have a score that’s within the good to excellent range, you may be able to get a more desirable rate.

Many lenders also allow you to pre-qualify and see what rate you could qualify for. This is helpful because it doesn’t hurt your credit as it is a soft pull, and is great to have on hand as you shop around. 

See if you qualify for a loan on Upstart!

It takes 5 minutes and doesn’t hurt your credit score.*

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* When you check your rate, we check your credit report. This initial (soft) inquiry will not affect your credit score. If you accept your rate and proceed with your application, we do another (hard) credit inquiry that will impact your credit score. If you take out a loan, repayment information will be reported to the credit bureaus.

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