How Do Online Personal Loans Work? The Dos and Don’ts
Unanticipated expenses are hard to prepare for. Whether it’s car repairs, a surprise medical bill, or even a needed trip you weren’t expecting, we all have times when we could use a little bit of cash. Under these circumstances, personal loans can be a helpful tool that gets us through the rough patch. What many are unaware of, however, is just how easy it can be to get a personal loan. What even fewer are aware of is how do personal loans work compared to online personal loans.
If you know where to look, you can apply for, sign, and be approved for a loan, all without having to set foot inside the lender’s office. These online personal loans can make the process hassle-free and streamlined, helping you get the money you need when you need it. Today we’ll break down what these loans are, how to get them, and some helpful tips in avoiding loan scams, so you can borrow safely.
Online Personal Loan Basics
What Is a Personal Loan?
Most people are at least somewhat familiar with three common types of loans: student loans, auto loans, and home loans. What many may not know is that student loans have a fundamental difference from the other two: there’s no physical collateral for the loan.
For most major loan types, there’s a tangible asset that’s being paid for with the loan that is weighed as collateral and can be repossessed in the event the borrower defaults. For home loans, it’s the real estate property. For auto loans, the collateral is the vehicle. Loans like student loans aren’t being borrowed to pay for a tangible asset. In other words, if you default on student loans, the bank won’t be confiscating your Bachelor’s degree.
We call loans without tangible collateral “personal loans,” and the list includes everything from the aforementioned student loans to credit cards and payday loans. Some personal loans are installment loans (meaning they’re intended to be paid back over time in monthly installments), and some are not, but they’re all intended for personal—as opposed to business—use.
What Can a Personal Loan Be Used For?
Personal loans can be used for just about anything. They can be used to put you through school, but the possibilities don’t end there. They can be used to repair or remodel a home, repair or upgrade a vehicle, pay for medical bills, cover travel costs, or even pay a bill or buy groceries if needed.
You can even use money from a personal loan to purchase tangible assets that you normally couldn’t buy on credit. Really, anytime you need to pay for something that requires you to handle the cash personally (rather than the lender paying it directly), you can use a personal loan.
How Do Online Personal Loans Work?
Online personal loans are a streamlined version of the traditional lending process. They have many advantages, especially for those who can’t or would rather not visit the lender in person. First of all, you can compare fees, pricing, rates, and loan amounts online, allowing you to shop around. You can pre-qualify online, saving you a significant amount of time. You can be approved online, which can often be done in a matter of minutes, and the loan is direct deposited to your account, giving you immediate access to the money.
Taken all together, online personal loans are often the fastest path from initial loan application to cash in hand. For those who need a financial boost in a hurry, there are few options as convenient as this.
Getting an Online Personal Loan
Who Can Apply for Online Personal Loans?
Most online personal loans are not installment loans, meaning the requirements for approval are less strict than those of long-term loans. That said, lenders will still look at certain criteria to determine your ability to repay the loan, and how much can be issued to you.
First and foremost, no personal loan lender will issue a loan unless the borrower has a stable source of income, typically in the form of employment. The reason for this is obvious—it’s difficult to repay a loan if you have no cash flow. In most cases, the lender will stipulate a length of time that employment must be held before being able to take out a loan. Here at Power Finance Texas, we require that the borrower have stable employment (meaning they’ve kept the current job) for at least three months.
Once income is established, a determination must be made based on how much income is being earned. Most lenders will have a threshold below which loans won’t be issued. For Power Finance Texas, it’s $1,000 per month. Those who earn at least that much each month will be considered for a loan, while those below that benchmark will, unfortunately, be turned down. This step is just another safeguard on behalf of the borrower, to ensure that they will be able to repay the loan when it comes due.
Beyond this, there are other requirements that are necessitated by the nature of the exchange, like an active checking account. Online loans have to be done by direct deposit (since you’re not going to be in person to pick up the check), and thus there needs to be somewhere for the lender to transfer the money to.
Similarly, lenders will need contact information (like a home or mobile phone number), identification, and so forth. Depending on where you live, regulations for what is required, and how many payday loans you can take out at one time will vary, so call a payday lender near you for more information.
How Do I Apply for Online Personal Loans?
While the application process will vary slightly from lender to lender, there are many parts of the process that are common to every lender. First, you’ll need to meet their requirements (income limits, available checking account, stable income for a sufficient length of time, and so on) whatever those may be.
Next, you’ll need some documentation that can prove you meet the requirements. This usually comes in the following forms:
- Valid ID for the state you’re applying in
- Payroll check stubs with year-to-date information
- Bank account number and routing number (which can be found on your personal checks)
- Valid phone number
- In some cases, your most recent bank statement
This information will all need to be entered into the proper digital forms, and you’ll probably be required to upload scans or pictures of your documentation. This can be done either with a scanner, or sometimes with adequate pictures of the document (like the ones you might take with your phone).
Once you have all of that uploaded, you’re ready to be prequalified for a loan. The prequalification will let you know how much you can borrow, what your interest rate will be, and what associated fees and charges will be included in the cost. If everything is in order, you can sign for the loan digitally. The loan will then be processed, and the money will be deposited into your account.
How to Spot Online Personal Loan Scams
As you begin shopping around for a lender, you need to be wary of online loan scams (of which there are many). Online loan scams like to present themselves as legitimate lenders, fooling you into giving them your information, and your money. This usually turns out about as well as you’d expect. At best, you’ll be dogged by pesky sales calls for months or even years. At worst, you could be trapping yourself in a predatory loan, or giving away your hard-earned cash at a time when you need it the most.
The good news is, like in any game involving deceit, your opponents have some well-defined tells. The following is a list of clear indicators that the “lender” you’re considering is not worth the risk.
Missing Contact Info
One of the biggest red flags is when pertinent information is missing from the “lender’s” site. This is most obvious when contact information is absent. If the lender doesn’t list a phone number, email address, or physical address (or the physical address pulls up an empty lot on Google Maps), don’t expect that they’re a trustworthy business.
Legitimate lenders want to be available to help if there’s a problem, and to answer questions when you have them. They will always list their information somewhere easily visible, and the information will be accurate. So even if you never intend to step into their office or call them yourself, you should at least be sure they have the information listed.
Fees and Charges
Another area where missing information should be a warning of dishonest business is with the lender’s fees and charges. Honest lenders will be upfront with what they will be charging you, and what the loan will cost you. Dishonest ones will try to hide that information from you, so you don’t realize what you’re agreeing to until it’s too late.
Similarly, if you notice that some shady fees are present when they shouldn’t be, you should walk away quickly. An example of this is if the lender is asking for a prepaid debit card as part of the application process. With a legitimate lender, any charges that won’t be paid by repaying the loan will be subtracted from the amount you are issued. In other words, you won’t need to pay anything upfront (which is ultimately the point of a loan).
A real lender will be doing things above the table, including obtaining all appropriate licenses for the state you live in. If you’re living in, and applying for a loan in Texas, for example, a legitimate lender will have a license for issuing loans in Texas. They will post this information on their website in a very visible fashion to advertise their legitimacy.
Loan scams will almost never have the proper license for doing real business, as obtaining the license requires paying fees. So if you search their website and can’t find proof of their license, then stay away.
In some cases, legitimate businesses will give themselves the option to share some of your information, but add an “opt-out” policy or clause that entitles you to tell them not to do that. If this clause is missing, overly complicated, or steeped in legal jargon, be wary.
Lead Generators/Loan Aggregators
Some scammers aren’t actually looking for your money; they just want your information. As mentioned above, some “lenders” will give themselves liberal privileges regarding sharing your information, so that if you give that information to them, they can sell it to the highest bidder. These are called “lead generators” or “loan aggregators,” and they don’t actually issue loans. Instead, they share your information and shop across multiple lenders for you.
While this may sound like a good idea as far as finding competitive rates and prices, it comes with some definite drawbacks. First, you have no control over the legitimacy of the lenders they approach. Second, the lenders will be contacting you directly, pestering you with emails and calls almost continuously. Lastly, there’s the issue of the mass sharing of your information, which always runs the risk of putting it in places that aren’t safe.
In short, if you suspect that a “lender” won’t actually be lending to you themselves, don’t give them your information.
Paying Money to Get Money
As mentioned above, legitimate lenders won’t require you to pay any upfront fees to apply for a loan. That would defeat the purpose. If you find that the lender you’ve chosen is trying to charge you some startup cost directly (rather than lumping it into the loan, or subtracting it from the loan amount), look somewhere else for your loan.
Lastly, there’s the issue of lenders with offices in other countries. In the U.S., there are rules about personal loans that help protect borrowers from being preyed upon by lenders and scammers. One way that some scams get around this fact is by basing their business out of another country, so they don’t have to adhere to U.S. statutes and laws.
This usually goes hand-in-hand with missing a state license, as a lender based in another country will have a hard time getting the license to operate state-side. So if you find that license missing, or see an address that’s from outside the country, be wary of the lender.