Online Unsecured Loan Pros and Cons
You need to borrow some money, right away, but aren't sure where to turn. You may do a search online, looking for a loan. If you do, you will find many types of loans online. Your credit rating is a key factor in finding the right lender for personal loans online.
Good Credit Loans Online
If you have strong credit and income, your best option for loans online will be to work with a traditional big bank. Banks like Wells Fargo and Citibank offer personal loans online. They both advertise easy processing, quick approval, and competitive rates. Still, online loans have rates that are quite high, even for borrowers with excellent credit. Citibank quotes rates from 10.49% to 25.49%.
Bad Credit Loans Online
If you have bad credit, it is hard to find a loan. Many lenders simply won't lend to you, because you're too high-risk a borrower. Your options for unsecured online loans are limited to lenders that charge high-fees to offset the risk of lending to you.
Bad credit borrowers generally seek loans online to fill a short-term need, such as covering a check that will bounce or make a car payment to prevent repossession. More borrowers take out payday loans online each year.
Online loans may appeal to you because they:
- Are simple to apply for
- Offer easy approval
- Give you quick cash
Applying for Online Loans
It's easy, almost too easy, to apply for online loans. Lenders do not check your credit history. Sometimes, you don't need to fax any documentation. Everything can be done online in a very short time.
Online applications generally require you to supply:
- Name and Address
- Bank account information
- Social Security number
- Driver's License number
- Employment information
- Paycheck Schedule
After you fill in the application and submit it, a lender will call you to go over your application and verify the information you provided.
Online loans can approve your application very fast, sometimes in just minutes. Your bad credit is not a barrier. In fact, most unsecured online loans are given to people with bad credit. Many online loans do not require a credit check. Lenders judge your ability to pay based on your employment status and gross income. You have to show that you're working. The amount that you can borrow is based on how much you're paid. Even if you are earning the minimum wage and working full-time, you're probably eligible.
The companies that give online loans can get you cash, in some cases, as quickly as the same day that you apply. Obviously, this has great appeal when you need the money right away.
Negatives of Online loans
Don't let the easy cash cause you to overlook the risks involved.
There are many drawbacks to unsecured loans online, including:
- High Costs: The cash is in your hands fast, but interest rates and costs are sky-high. You can expect to pay $15 to $30 for every $100 that you borrow. If you calculate the annual interest rate for a short-term online loan, it can be top out at over 1000%! You expose yourself to high penalties if you don't pay the loan back as agree. If your lender takes it automatic withdrawal when your account lacks the funds to cover the payment, you face charges from your lender and your bank.
- Hard to track down: If there is a problem, you can't visit an online lender. You may find your calls are not quickly returned, if you have a complaint to make.
- Personal information at risk: You need to exercise extra caution when you pass out your SSN and private information to a lender that is here today but may be gone tomorrow.
- Jurisdiction: Online lenders often try to avoid state regulations that cap interest rates and fees and laws protect you from predatory lending practices. They may not be licensed in your state, possessing only a license from a state that doesn't tightly regulate lenders. They may even be based overseas.
- Easy in, Tough exit: Some online loans are structured to take only the finance charge from your next check and to keep rolling over the principal. This kind of loan is a debt trap that is tough to escape from once the principal keeps growing. Don't turn an online loan, which is supposed to be a short-term stop-gap, into a long-term problem. If you're not careful, you can end up paying far more in interest than the amount you originally borrowed.
- Aggressive Collection: Payday lenders have a reputation for collecting on unpaid debts aggressively. Bills.com regularly receives readers' comments about collection efforts that overstep the law, such as threatening arrest for non-payment. From our experience, online lenders are the worst offenders.
You may be aware of all these drawbacks and still move forward on an unsecured online loan. The reason people take out such high-cost loans online is that they don't have alternatives. Even expensive cash advances on a credit card cost far less than a payday loan. However, if you don't have access to a credit card with an available cash advance balance, a payday loan may be your only alternative.
Separate from the high costs and other risks that come with legitimate online loans, you need to be extra careful to avoid being scammed when borrowing online.
The federal government and many states have taken action against dishonest online lenders. You should know about the scams that victimized people, so you don't fall for them.
- Fees for other services: Be careful that you are not signed up for any other services aside from the loan you seek. Some firms enroll customers in ongoing programs that charge fees every month, requiring you to state that you don't want the service. Watch your bank account carefully, to make sure that you are not billed for services that you don't want.
- Unauthorized debits: The FTC has taken action against online lenders that charged consumers' bank accounts without consent and without disclosure.
- Bait and Switch: According to the FTC, online lenders have "targeted consumers who were unemployed or had poor credit, selling a bogus '$10,000 credit line' that was really an online shopping club membership and a 'no cost' prepaid debit card with hidden fees."
- Fake collections: Numerous consumers have informed Bills.com about scammers impersonating law enforcement personnel or attorneys, making threats to take legal action or arrest the consumer, if money is not paid immediately. Don't panic and make a payment, if someone makes this kind of threat against you. A legitimate debt collector will not act this way.
Be wary when you shop for loans online. Make sure to check out any lender you're considering. Find out if it is licensed to do business in your state. The last thing you want to do when you're short on funds and short of cash is to get ripped-off and make your problems worse.