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Are online loans safe?

Using an online lender is a legit way to get money

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Online loans are great if you want to be approved for a loan but want to avoid dealing with a conventional bank. You can complete the entire process on your computer or mobile device.

While getting a loan online is convenient and generally safe, you might still have some concerns. The process of applying for an online loan requires you to send a lot of sensitive personal and financial information. It’s important to vet your lender before ever sending personal information.

Key insights:

  • Online lenders use technology to help consumers find loans that suit their needs.
  • Some online lenders can provide faster loan approvals or lower rates and fees than traditional banks.
  • Identifying scams can keep you safe while looking for the right online lender.

What is an online loan?

An online loan allows you to borrow money without having to go to a physical bank. Instead, you can apply for an loan from an online-only lender or a traditional lender offering online loan options. You can complete the entire loan process, from pre-qualification to submitting your documents and receiving funding, online.

Online lending is a legitimate business model that uses technology to help consumers borrow money in a streamlined and convenient manner. Thanks to automation, the application process is often more efficient and many lenders work with a broader pool of people than traditional banks. For instance, some online lenders focus on people with poor credit.

Are online loans legit?

Many online loans are legit. Banks and other institutions that offer online loans must meet the same rigorous criteria as traditional banks to lend money. That's not to say you shouldn't be wary of potential scams, but there are a few factors you can examine to assess if an online lender is legitimate.

Check if the lender is registered in your state

“If you are dealing with a lender for the first time, visit your state banking regulator and make sure [the lender is] registered and in good standing,” said Andrew Latham, certified financial planner and director of content at SuperMoney.  Latham recommended checking the Consumer Financial Protection Bureau (CFPB) list of state banking regulators.

Checking if a lender is registered allows you to assess whether or not the business is legitimate. Consider a different option if the lender isn't registered or in good standing.

Check online reviews

Online reviews are a great place to go to see other peoples’ experiences with the company. Reviews and complaints can give you an idea of how it treats its customers and if there are any major concerns. You’ll want to stay away from companies with many negative reviews.

Look for red flags from potential lenders

There are also some red flags you can look for to assess the legitimacy of an online lender.

  • Not requiring a credit check: Most legitimate lenders have criteria you must meet to qualify for a loan, including for your credit history.
  • Pressuring you into a loan: Scammers will often pressure you to feel like you need to rush through the loan process. A lender should encourage you to read the fine print and happily answer your questions.
  • Asking for upfront payment: If a company asks you for money upfront to cover the cost of your application, think twice. You should never have to pay money before you get your loan.
  • Calling you out of the blue: When you want to borrow money, you search for the lender. It’s not normal for a lender to contact you unprompted to offer you money.

Can I trust an online lender?

“A loan from an online lender is just as safe as one issued by a large brick-and-mortar bank as long as you’re dealing with a legitimate lender,” said Lantham. If you’re hesitant to use an online lender, there are specific features you can look for to help ensure that the lender is safe. Some examples include:

  • Two-factor authentication (2FA). As a safety measure, an online site or app might require two separate forms of identification to gain access. For instance, you might have to type in your password and then enter a confirmation code that is sent to your cellphone or email address.
  • Encryption. Before sharing your personal and financial information online, ensure the site is encrypted. Encryption is a way of securing digital data. To tell if a site is encrypted, look for the padlock symbol, usually to the left of your address bar.
  • Secure URL. You can also look at the company's URL (its website address) to see if it starts with “http” or “https.” The “s” is important because it stands for “secure” and helps to reveal whether the website is secure.

Why consider an online lender

Only you can decide what you want from your loan experience. If you value face-to-face contact and want to ask questions about your loan in person, you may prefer going to a bank. On the other hand, if you value convenience and a streamlined application process over an in-person experience and are comfortable applying for a loan online, then an online lender is the right fit. Other reasons you might consider an online lender include the following:

  • Fast preapproval: Many online lenders can provide loan preapproval almost instantly.
  • Lower interest rates or fees: Since online lenders don’t have the expensive overhead that comes with owning physical retail locations, you may find lower interest rates or fees.
  • Streamlined and convenient: Online lenders work to streamline the application process to make for a positive user experience. Completing the entire loan process online without leaving your home also offers a high level of convenience.
  • Fast access to loans: Some online lenders might offer you a loan within a day or two, while a bank could take a week or more.
  • More accessible: Some online lenders are open to borrowers with low credit or those with a limited credit history.

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    What is the difference between an online loan and a bank loan?

    The main difference between an online loan and a bank loan is that, with an online loan, you can complete the entire process using your computer or mobile device. You pre-qualify online, submit your documents online and get your loan funded online. With a traditional bank loan, you go to a physical bank branch and apply for a loan face to face.

    What do you need to get an online loan?

    While the application process will vary between lenders, you typically need to provide personal information, including your name, address, date of birth and Social Security number. You will also need to provide financial information, which may include proof of income, credit score and a list of debts.

    Are online lenders risky?

    Online lenders are not inherently risky. You can even find brick-and-mortar banks that offer online loans. However, it’s important you confirm the legitimacy of the online lender before completing an application. You don’t want to inadvertently use a fraudulent lender.

    Bottom line

    Before working with an online lender, do your homework and confirm the company's legitimacy. While most online lenders are safe, unfortunately, scammers exist. By taking simple steps like ensuring the lender is registered in your state and reviewing online customers’ comments and reviews, you can feel more confident about the lender. If you’re careful, borrowing money online can be as easy as a few clicks of a button.

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