Regardless of the financial need, taking out a personal loan can affect your life in a big way. This is why it is important for borrowers to carefully consider the different options available to them. Consider them before making an application for the loans. With an increasing number of companies offering personal loans today, it is easy for consumers to fall prey to scams. Similarly, failure to compare lenders as you shop personal loans could see you taking out a loan that you cannot afford.
Most financial experts advise borrowers to use a third party to compare different lenders. This one not being a loan business will help you find a reliable company to work with. Generally, those looking to borrow money for a variety of needs can either work with online lenders or banks. Here is what borrowers need to know about online lenders vs. banks when it comes to personal loans.
How Does a Personal Loan Work?
Whether you are looking to get a personal loan online or work with traditional lenders. Knowing how these loans work will make it easier to identify a suitable loan company. The first step would be to understand what personal loans are. Then consider the uses to which the borrowed funds can be put as well as the basic features of the product. Such knowledge will also put you in a better position to determine the better option for you when comparing online lenders vs. banks.
Even as you shop around for personal loans, it is important to remember to look over the paperwork before signing any documents. Once you enter a financial commitment with a lender, you will assume certain responsibilities over the term of the loan.
This makes it important to not only understand the terms of the loan, but also look at the interest rates charged. Not to mention prepayment penalties as well as any other charges. The term of the loan will also affect how much you will be paying back in monthly installments. What is a factor that will help you decide whether you can afford the loan, or not.
Although personal loans have certain similarities, there are a number of features that will vary. Especially depending on the lender you choose. In addition to other factors, a look at the loan terms will help you identify a reliable lender. If you do not understand how these loans work, it will help if you talked to an expert before taking out a loan.
Key Differences between Online Lenders and Banks
Any time you wish to loan shop online or go into a bank, you should think about the products you get from each lender. Here are key differences between online lenders and banks to help you make an informed decision.
- Interest rates – compared to online lenders, banks tend to offer lower interest rates on personal loans. One reason for this is that banks have access to a large pool of capital. They also make money from the wide range of products they offer customers.
- The time involved – It can take a few hours to apply for a loan online and receive feedback. Indeed taking out a loan with a traditional bank can be a lengthy process. It may involve submitting documents, making phone calls, and visiting a branch before receiving funds.
- Qualifying for the loan – generally, the underwriting process and requirements by traditional banks are stricter than those of online lenders. Banks may require you to operate an account with them for a certain period before being eligible.
- Costs and fees – most online lenders will be inexpensive to apply for a loan with but will have high-interest rates. While banks do not guarantee approval, they tend to have lower upfront costs and fees.
These differences provide answers to questions that may arise when comparing online lenders vs. banks. Armed with this knowledge, borrowers will evaluate their circumstances, match them with what each of these categories of lenders offers, and know where to turn to for a personal loan.
Personal Loan Eligibility Requirements
Just as with other loan terms, every loan company will have its own set of eligibility requirements. This explains why a good number of peoplego to a loan shop when they need extra cash to cover emergency expenses. These sources of loans allow borrowers to access money within a short period and are usually more flexible than most online and traditional lenders.
When pitting online lenders vs. banks, borrowers will need to look at what works for them. Most online lenders will look at the borrower’s income-to-debt ratio to determine whether they qualify for the loan as well as the amount they can borrow. Some lenders will also check whether the borrower pays their monthly bill on time, request for proof of income, consider age, employment stability, and the credit score. Depending on the lender you decide to work with, you may also need to submit a number of documents alongside your application.
Generally, traditional lenders are known to have stricter eligibility requirements when compared to online lenders. In fact, as you shop personal loans online, it is possible to come across lenders who advance these loans to people who have poor credit scores. This makes it crucial to know what to look for in a lender. Loanry can make loan shopping process a bit easier, by connecting you with reputable lenders our partner Fiona has selected.
Qualities to Look for in a Lender
The benefits of working with a reliable lender when taking out a personal loan cannot be denied. As such, this is one of the important considerations to keep in mind as you shop personal loans. Identifying a good lender will require that you know some of the characteristics to look for.
- Sufficient lending limit – nobody wants to work with a lender who cannot advance the loan amount they require to sort out their financial needs. Therefore, a reliable loan company is one that is stable and willing and able to lend higher amounts of money.
- Flexible – banks not only have guidelines that govern how they issue loans but are also subjected to regular audits to ensure they comply with set guidelines. However, most borrowers look for lenders who take into account their capability without breaking the rules. This ensures that the borrower can repay the loan comfortably without being overwhelmed.
- Responsive – the terms used by financial lenders can be confusing and intimidating. A good lender should be responsive to the needs and concerns of the borrower, taking time to explain details of the loan and helping borrowers make the right choice. Rather than taking advantage of borrowers, the lender should help whenever borrowers do not understand certain aspects of the loan.
- Solid reputation – with the increase in the number of lenders today, borrowers are keen on working with trustworthy loan companies. You can establish the credibility of a lender by reading reviews posted on social media platforms to learn about the experiences of other customers.
A good lender should have adequate industry experience so that they can address and handle the needs of their customers. In addition to offering a personal loan, a good lender should be willing to help you manage the funds better. By deepening your knowledge and helping you grow money, the lender will have pushed you closer to your financial goals.
With these qualities in mind, it will be easier for borrowers to make an informed decision whenever the online lenders vs. banks question come up. However, the decision over which lender to turn to will also depend on your circumstances at the time when you need the money.
Reasons to Give when Applying for a Personal Loan
As much as the debate pitting online lenders vs. banks when it comes to personal loans is important, it is equally necessary to improve your chances of securing funding. Below are some of the common reasons borrowers give when applying for these loans.
- Consolidate debt – consolidating credit cards and other debts into a single monthly loan repayment is usually a wise financial move as long as your interest reduction saves money. As such, lenders are likely to offer loans to borrowers who state this as their reason for taking out a personal loan.
- Wedding funds – major life events such as weddings come with their fair share of expenses. For this reason, an increasing number of people have wedding expenses as their reason for applying for a loan. Lenders are also reviewing this regularly and have come to accept it as a valid reason.
Statistical Reasons to Get A Personal Loan
- Buy a car – some people wish to own cars but do not have the money to pay for it upfront. Since most lenders understand this, they will accept this as a reason for taking out a loan. Auto loans allow borrowers to make big purchases and pay back the loan in smaller installments.
- Handle an emergency – whether it is a medical emergency or any other kind of emergency, unexpected expenses may require emergency cash loans. With a reliable lender, borrowers will be in a position to handle the emergencies without much strain.
- Home improvements – homeowners can take out a personal loan to carry out home improvements. Such upgrades not only make the home more functional but can also increase the value of the property.
This list is by no means exhaustive. There are many more reasons why people take out personal loans. It is important to be transparent and demonstrate an ability to repay to improve your chances of being approved.
The impact of your credit score
There are several factors that borrowers have to keep in mind when doing a online lenders vs. banks comparison. This is because most lenders take these factors into consideration when making the decision over whether to give a loan and the amount to be given. One of such factors is the credit score of the borrower. According to lenders, your credit score is an indication of how much of a risk you are to the lender. The score also shows your past borrowing and repayment habits.
With the important role that credit scores play during this process, it is necessary for borrowers to familiarize themselves with how a credit score affects the application and approval of personal loans. Your credit score will determine whether you qualify for a personal loan, how much you can borrow, the sources of loans available to you, and the interest for your loan. Generally, people with a good credit score will have more negotiation leverage and will find it easier to get a loan.
It is important to note that a personal loan can present a good chance to improve a borrower’s credit score. At the same time, depending on how the funds are used, the loans can also be the beginning of financial difficulties and frustrations for the borrower. As much as you may have a good credit score and qualify for a personal loan, you should ask yourself whether it is necessary to take out the loan. This is because the loan will reflect on your credit report regardless of whether you pay it back in time.
What to do if you have bad credit
There are times when borrowers will want to apply for a personal loan but have bad credit. This is one of the situations where an online lenders vs. banks is critical. The good news is that there are a number of lenders who give out personal loans for bad credit. Here are some of the options you can consider in case you do not have time to work on your credit score.
Take out a secured personal loan
Most personal loans are unsecured, meaning that borrowers are not required to provide collateral to back up the loan. However, borrowers who have a low credit score can consider going for secured loans. In this way, the risk associated with defaulting on payments will be significantly reduced. By doing so there is a chance you will get a lender who will be willing to offer the loan.
Get a cosigner
Getting a cosigner is another way to improve your chances of getting your loan approved if you have bad credit. Lenders will require that the cosigner has a source of income and a better credit score than the main borrower. Such a cosigner will have certain responsibilities regarding the repayment of the loan.
Borrow from family and friends
Depending on the reason why you need extra cash, you can consider borrowing from family and friends to meet your needs. One of the advantages of borrowing from such sources is that they will not need to look at your credit score and history. However, it is important that borrowers treat this as a serious transaction to avoid causing strains on the relationships.
Boost your income
In case you are saving for a particular purpose, you should think about cutting down on expenses while boosting your income. These actions will ensure that you save more money, allowing you to reach your goals within a shorter time. Getting a part-time job or a side hustle would be a great way to start.
The best way to identify lenders who give out loans with bad credit is to shop personal loans. We make it easy and convenient for borrowers to find reliable lenders. As a third party that is not in the loan business, we strive to help consumers to avoid falling victim to common scams.
How to improve the chances of getting approval for a personal loan
Aside from the online lenders vs. banks question, it can be frustrating for borrowers if their personal loan application is rejected. This is why borrowers are advised to take the necessary steps to ensure that they increase their chances of being approved.
- Improve your credit score – it is clear that most lenders rely on a borrower’s credit score to approve or reject a loan application. Borrowers can work on improving their score by paying their current loans on time. It would also be important to reduce current debts to achieve a healthy income-to-debt ratio.
- Have the required documents ready – some of the documents that lenders may require borrowers to submit include a government-issued ID, bank statements, and Social Security Number. Borrowers who keep these documents ready will have an easier time when applying for a loan.
Here is a Good Video Explaining How to Up Your Odds of Approval
- Keep your income steady – lenders consider borrowers who have a stable employment history of being less of a risk to them. Financial experts discourage against changing jobs frequently as this could hurt your chances of getting a personal loan.
- Apply for loan amounts you can afford – one of the factors that should guide you when choosing the loan amount to apply for is your income. Applying for an amount you can comfortably repay will be a way of demonstrating your ability to pay back the loan.
- Consider a cosigner – cosigned loans are usually less risky for lenders because they have several people from whom they can collect money in case you default on payments. The person you get to cosign for you should have a higher income and better credit than you.
In the end, choosing a suitable lender will also go far in helping to increase your chances of being approved. This means identifying a lender that is well matched to you and to your needs. Working with such a lender will also ensure that the repayment experience is seamless and stress-free.
Personal loans to stay away from
As much as people would rush to a loan shop when they need quick cash, borrowers should be aware of the types of personal loans to stay away from. While loans can help people address their financial needs and move closer to their goals, thorough research will help in identifying the products and lenders that are right for each individual.
Auto title loans, payday loans, and cash advance loans are known to have not only short repayment terms but also high-interest rates. However, a good number of people find themselves applying for these loans when they have poor credit. This means that the cost of borrowing will be high when you go for these loans. At the same time, the short repayment terms will automatically translate to larger installment amounts, making it harder for you to meet your financial obligations.
Even with bad credit, borrowers should avoid these three types of loans. A little research will help in avoiding instances where a borrower will end up in a worse financial situation. As you compare online lenders vs. banks, you should also take time to look at loans that could get you in trouble.
How to look for an online lender
Finding a good lender is one of the first steps in enjoying the benefits associated with personal loans. Below are some options to consider as you shop personal loans online.
- Work with a loan broker – an online broker will charge you a fee for looking and finding the most appropriate loan for you. Most brokers know some of the best lenders in the industry. This makes your work easier and leaves you with time to attend to other issues.
- Look for a loan aggregator- a loan aggregator works similarly as a broker. However, instead of charging you a fee, they will charge the lender. An aggregator lets you compare different options so that you can choose the lender that will effectively help meet your needs.
- Search online – apart from helping you find a reliable online lender, an online search will reveal to you a clear comparison of online lenders vs. banks. However, you should make sure that you dedicate enough time towards finding a lender on your own.
Choosing the best lending source
Considering the facts relating to online lenders vs. banks, there is no single best source for every borrower. The loan company you go for will depend on the loan terms they offer as well as your individual circumstances. However, there are a few guidelines that borrowers can follow to find the right lender for their situation and needs.
In case you qualify for a loan based on your credit score and do not need the money quickly, you should consider taking advantage of the lower interest rates, higher borrowing limits and better loan terms offered by banks. On the other hand, if you do not meet most of the requirements, want a simple application process and need the funding quickly, you can go for online lenders.
How to find the right personal loan for you
Finding the right personal loan for you will require that you look at a number of factors. While pitting online lenders vs. banks, you should also take time to find a loan company whose qualifications you can meet. This will help you avoid the frustration of being rejected after you have spent time completing the application. Once you do this, you should establish the kind of customer care your preferred lender offers customers. This can be achieved by going through reviews to find out more about the experiences of other customers.
While applying for a personal loan is easy, getting approved is the hard part. Make sure you try to find out if an online application is right for your situation. This step will involve looking at your financial position as well as the use to which you intend to put the borrowed funds. Lastly, rather than going to a loan shop first, you should test-drive online lender platforms by getting pre-approved.
In the end, technology has played a critical role in ensuring that finding and applying for personal loans is quick and convenient. When you are looking to get personal loan online, you should make an objective comparison of online lenders vs. banks. One of the best ways of doing this is by conducting research through a third party. Our platform makes it easy for consumers to find reliable lenders, taking out personal loans that best address their needs.
Cole is a personal finance research analyst and writer with extensive experience in building and maintaining a corporate brand utilizing both qualitative and quantitative methods. Cole has written on a diverse range of topics including financial planning, cryptocurrency, commercial real estate, and tax strategy. A graduate from Drexel University, Cole seeks to demystify financial borrowing and help individuals achieve financial freedom.