Pros and cons of online loans: What you need to know
If you are in the market for a loan, the chances are you might be a bit confused about where to turn. The online market is saturated with offers, interest rates, APRs and financial jargon that is designed to target you, but how do you know the providers that are genuinely trying to help you from those who want to hide their fees in the small print?
Our guide is looking at all you need to know when you are considering applying for a loan online. We have kept this balanced and informative to help you make a confident and informed decision about your future finances.
Let’s Start With The Pros Of Online Lenders:
You Can Compare Your Loans Online
When you are shopping around for loans, the biggest advantage of an online lender is that they can show you the best (as well as the cheapest – it’s not the same thing) option for you! Many providers are willing to compare online loans for their customers and still tell them if a competitor or another lender in the market is a better or more suitable alternative. Deciding to compare loans online can also make you feel more confident in the financial product you have selected or lead you to a better option for your finances.
With modern technology, comparing loans with direct lenders or price comparison websites will be unlikely to leave an inquiry mark on your credit score. This is because sophisticated software is able to utilise the data a consumer provides to evaluate their creditworthiness and trustworthiness as a borrower. This is known as a soft search and simply matches you with your credit file.
The Application Process Is So Convenient
An online loan naturally has a completely online application process. This means it can be completed at a time that suits you, and although this feeds into our on-demand lifestyle with our imperative need for total flexibility, it also affords us the opportunity to leave the application and go back to it if we feel we need to. This convenience, combined with access to information, may help to educate consumers about the responsibility of taking out a loan, and what it may mean for your future finances.
In turn, online loans do have the same benefit of anything on the internet – it’s 24/7. That means if you are applying for a loan because you need money quick as something has gone horribly wrong on holiday and you don’t have the back up funds to cope, a personal loan might be there to help you out – even if you’re somewhere along the equator!
Many online direct lenders, particularly those operating in the personal loans market of consumer credit, will be able to offer their customers pre-approval based on a soft search. This is less likely to be a guaranteed option for consumers that do have bad credit, but for those who are accepted it provides a good understanding of where you stand and your creditworthiness.
Moreover, submitting for pre-approval does not affect your credit score, it just allows you to keep track of the offers you have. Consumers can still shop around for a loan that suits you, if you have the time to do so.
Extremely Quick Access To Cash
Utilising online lenders is an extremely efficient process. When you have decided you need a loan to make necessary purchases or move forwards in your life or even to cope with an urgent financial emergency, you can apply and get the money in your account on the very same day. This fast action allows consumers to stay dynamic and react quickly to a situation at hand, which may protect their credit in the long term, too.
An online lender is also more likely to work transparently and keep their customers in the loop with the application process. Many send text messages and emails just to keep people updated on the status of their loan application.
Quick access to money is particularly advantageous with improved or increased lending limits online. Fintech and direct lenders are experiencing an upturn, whilst traditional banks are experiencing a fall and decrease in business. This means that they are being a bit stingier with how much they are willing to lend their customers, whereas online lenders have so much backing from investors at the moment that they are more likely to give you access to all the funds you need. This can be particularly advantageous for those looking for debt consolidation or secured loans of a higher value.
Improved Accessibility For People Who Have Been Refused Credit
As has already been established, the decline in business for banks as a result of increased competition, traditional sources of credit are more risk averse than ever. This means that they may hike their prices up to cover the cost of lending to someone that might not have the best credit history or refuse to work with them altogether.
As with all markets, including retail, there are so many more options and specialist, unique products available online! This also extends to the loans market; there are online lenders that specialise in certain types of loans, including those more suited to borrowers who have not previously had a perfect history of repaying loans.
Cons Of Using Online Lenders
Trusting Online Lenders
Banks, building societies and credit unions are typically the names we trust because we see them all the time, passing their branches on the street or seeing adverts on the TV since we were young. Longstanding institutions have usually established a reputation for themselves, and whether this is a good or bad reputation doesn’t really matter, because we inherently trust the names we know.
In contrast, there are so many new players and fintechs available for online loans. This makes the whole thing a little daunting and scary, especially if you are applying for a loan for the first time or are particularly nervous about working with a cowboy.
The way around it? Check their background. You can check they are registered with the necessary regulator to ensure they are a compliant and responsible lender to still take advantage of the impressive rates available online.
It Could Be Best To Go Direct To Your Current Bank Account Provider
One of the biggest plus points for opting for a traditional bank for a loan is if you already have an account with them, you may get added benefits. If you have a current account, checking account or even a savings account with one provider, they will quickly be able to assess your creditworthiness as they have direct experience and knowledge to interpret your relationship with money. If this is positive and you have maintained good credit, repaying your loans, credit cards and overdrafts in appropriate time frames, you may be offered incentives and other offers when you apply for a new loan. This could be something like interest-free months or cash back rewards.
Sometimes, this process is also streamlined and can provide quick access to cash too, because the bank already has some of the information they need available. In turn, going direct to an online lender is generally the quickest way to get access to the money you need.
Over Dependence On Price Comparisons & “Best Value” Options
More and more often in our society we are becoming obsessed with the cheapest options and paying the absolute minimum we possibly can. This is completely fair, especially when you consider how much the cost of living is rising whilst wages are staying the same. We are all just looking for more bang for our buck, no matter what we are paying for.
When it comes to financial products, this could be a little more dangerous. Everyone detests having to pay for the privilege of having access to credit, but it is unavoidable (the entire banking industry is founded on it), but sometimes we might become a little too dependent on the information price comparison websites give us.
Realistically, these websites do not provide completely unbiased information, as they are sometimes sponsored by certain providers who bid to be at the top of certain enquiries or search results, despite not being the best option.
In turn, we depend on the information given to us rather than doing our own research, which is equally important (it’s vital to check consumer credit websites about the consensus on a creditor). We fail to consider aggregates that abstain or intentionally do not subscribe to price comparison websites, even though they may be a better option for some consumers.
In a post-Cambridge Analytica-scandal world, we are all becoming more and more conscious about what our data is being used for and a little stingier on the data we willingly provide to companies or databases. This includes price comparison websites, in which the amount of information required will vary.
The unique thing about applying for online loans is that different lenders (and brokers or services) may ask for quite personal information, including details about your financial history and what we might consider the most private and confidential things about ourselves.
It is important to note that there are risks associated with all financial products and commitments, including loans. Financial knowledge and confidence dealing with financial matters is at an all-time low for Millennials and young people. This could be one of the reasons the same demographic is finding themselves in debt cycles and more frequently seeking debt help. In turn, it just goes to highlight how important it is to fully understand loans and financial agreements you enter, whether they are from online lenders or more traditional means of sourcing credit, such as banks. This can help to ensure you are confident you can stick to a repayment schedule and will have a positive experience with your loan. Depending on how you like to consume information, an online loan could provide another, small advantage; information is displayed simply and concisely, and all the information is available on a website. If you go into a bank for the money you need, some things may be lost in translation in verbal communication and the whole process is more disjointed, which does leave a little bit more room for error.
Adhering to a loan agreement is the consumers responsibility and it is important for maintaining a positive and healthy credit score that repayments are met, wherever you have decided to source your credit. Yet, going online for a personal loan gives you all the opportunity to compare the costs of different providers to ensure you are comfortable with the repayments.