Online lending is part of the developing technology of all industries. Billions of loans are funded every year through the internet. But if you are looking for a loan online, there are certain features of it to focus on so you don’t fall into a trap.
What to watch out for and how to deal with it:
1. Initial Low Interest Rate
Interest is the primary cost of the loan. And for lenders, the primary business model. You should accept that interest rates for online lenders will be higher than traditional banks, since the trade-off is that approval guidelines are much easier with online lenders. To not scare away their potential borrowers, many online lenders will offer a low or zero percent interest rate in the beginning as a promotion. But similar to credit cards, many times the interest rates after the promotion will be higher than the market rate to make up for the lost revenue for the lender.
To avoid this, calculate the cost of the loan once you make the last payment, and match that to your financial limits. Compare that to the final cost of the loan to lenders who don’t offer a promotion. In the end it might be higher or lower but it’s worth the investigation. Never take a lender’s bait, especially if a collateral is at stake.
2. No Credit Check Advertising
When you have good credit, lenders will beg you to accept their money. In the alternative lending world, much of it online, if your loan can be approved easily without reviewing your history and credit, then the lender is charging you higher fees and rates for the risk they take. Understand that whenever you are being offered a loan with no credit check, that the cost of the loan will be much higher than standard process verification loans.
3. Upfront Application Fees
Never EVER borrow from lenders that require you an advance payment prior to your loan application. This could be marketed by them as an “Application Fee”. Although some lenders ask for origination fees at the time you get your money, any payments you make before getting approval could be a scam.
4. Origination/Processing Fees
Borrowing money doesn’t have to cost you a huge amount upfront. When applying for a loan, always check the interest rate AND the processing/origination fees before proceeding with the application.
Also, understand that both interest rates and processing/origination fees are negotiable. And if a lender has approved you, there is a good chance other lenders will approve you and reduce their rates to get your business. Discuss with each loan rep their fees and the ability to reduce them to close on the loan.
5. Online Debt Consolidation
There are online lenders that promote consolidation loans if you have bad credit or owe many lenders money. The convenience is that you are paying one lender instead of many, but the cost is essentially the same (or could be higher after factoring in the origination fees). It’s wise to only do debt consolidation once matching total cost of the new loan to your current loans, comparing the interest rates, origination fees, and terms.
6. Speak To Different Lenders WITHOUT Having Them Pull Your Credit
Choosing the right loan to suit your needs can be difficult. This is why it is important to speak in detail to a variety of online lenders to understand not only what they offer, but how their loan products differ than other lenders. The more details you know, the better understanding you will have.
But it is equally important to not have each lender pull your credit. Every time a new lender pulls your credit, it affects your credit score negatively.
To best avoid this, present to each lender a recent credit report you pulled on your own (on your own does not affect your score). After which, discuss the pre-approval rates based on that credit report. Once picking the best lender based on your pre-approval, allow them to then pull your credit to get a full approval. It is important not to do anything that will affect your credit score between the time you show lenders your report and the time your preferred lender pulls your credit.