Online lending has made it easier and more convenient than ever before to get the funds you need. But that convenience comes at a price: risk.
Because you're not visiting a brick and mortar bank to apply for a loan, you really don't know who you're dealing with. Unscrupulous lenders may charge outrageous interest rates or have unfair terms that are confusing to borrowers.
Before you commit to taking out a loan online, consider these six tips.
1. Check and Improve Your Credit Score
Before you even start looking at lenders, check your credit score. Knowing your score will give you an idea of the type of loan you can take out.
Some lenders disperse loans to all borrowers – regardless of their credit score. While this can be convenient and helpful in emergency situations, it can also get you into trouble. Bad credit loans usually have much higher rates, and the terms of the loan may not be favorable. You may even be penalized for paying off your balance early.
If you're not in an emergency situation, consider taking the time to improve your credit score before you . Scores can change in as little as a month, and just a small change in the right direction can give you a better rate.
2. Research the Lender's Reputation
Searching for "online loans" on Google and choosing the first lender on the list is not a good idea. Before you think about submitting an application and giving your personal information, research the lender to make sure they are legitimate and reputable.
A lender may be credible, but that doesn't mean they provide great customer service or offer fair terms on their loans.
As a borrower, it's your responsibility to do your due diligence and make sure you choose a lender that meets your standards. And be sure to read all of the fine print before you even consider moving forward.
3. Protect Your Identity
Be smart about the information you give to online lenders. Do not give your financial information or personal information to a company before you do your research.
Avoid companies that use teaser rates and bait-and-switch tactics to reel in borrowers.
While there are plenty of reputable online lenders, there are also scammers that are only looking to steal your information.
Remember, you'll need to give the lender your financial and personal information when submitting an application, but you shouldn't have to give this information before then.
4. Compare Rates and Lenders
Protecting your identity and making sure you deal with a reputable lender are two of the most important things when taking out an online loan. Comparing rates and lenders is equally as important.
If you take out a loan with the first lender you find, you may wind up paying more in the long run.
There are a few different ways to compare lenders and rates. You can do it the old-fashioned way by manually writing down every lender's name, rate and terms. But you also have the option of using a comparison site that will take care of this for you. These sites will make it easy to compare the details of the loan with different lenders at a glance.
5. Know the Fees
One of the biggest issues with online loans is that you often wind up paying surprise fees, like origination fees.
Some lenders may offer lower interest rates, but they tack on origination fees that essentially raise the interest rate of the loan.
Hidden fees may wind up making the loan more expensive than ones with high-rate lenders.
6. Think Twice Before Agreeing to Automatic Withdrawals
Automatic withdrawals may sound like a convenient option because you don't have to worry about late or missing payments. But what if you don't have enough money in your account for the payment?
It's worth noting that some lenders make automatic bank withdrawals a part of their loan terms. This means you would need to opt out of the arrangement to stop automatic withdrawals from your personal bank account. And in some cases, lenders will actually charge you a fee to pay by any other means.
One last thing to consider: Is the rate fixed, or variable? With a variable rate, your payments may change from month to month and will be dependent on the current rate. When interest rates rise, your loan payment will rise, too. With a fixed rate, your payment will always be the same.