A beginner's guide to shopping around for online loans

The online loan process can be simple, seamless, and fast. But, just because you find a lender that’ll give you cash quickly doesn’t mean it’s the best option. With some time and a keen eye, shopping around for an online loan can mean lower monthly payments, fewer fees, and a lender you love working with. 

Read on to learn more about shopping around for an online loan. 

Simply put, people get a loan online when they want to make a purchase but don’t have enough cash to do so.

That could be anything from buying a home to paying for school. Online loans enable borrowers to “buy” something using the lender’s cash, then pay for it over time in installments, typically with some added interest.  

Online lending makes it easier than ever to borrow cash to make purchases. But just because it’s easy, doesn’t always mean you should do it. 

Before beginning the loan process, consider whether it’s the right option for you. 

But, before you hit buy or agree to a loan, it’s worth considering:

• Is this a need or a want? 

• Can you afford monthly installment payments? 

• Will this payment impede your other financial obligations?

• Will this loan save you money in the long term? Is it consolidating other debt?

Sometimes, saving for the item in cash or waiting until you’re on better financial footing is better.   

When getting a loan online, it’s common for lenders to examine everything from your credit score to your payment history. 

The stronger your financial footing, the more likely you’ll be approved for a loan. Lenders may look at any or all of the following to decide if they want to approve your loan application: 

• Credit score. Lenders typically like to see at least a good credit score, between 680 and 740, to approve a loan. Generally, the better your credit report, the more favorable your interest rate. You can keep an eye on your credit score using personal finance apps.

• Earning power. Banks might ask for proof of consistent income to ensure you can afford monthly payments. 

• Debt-to-income (DTI) ratio. This ratio indicates how much of a borrower’s monthly earnings is already going toward paying debt. Generally, an ideal DTI ratio is 36%. 

• Collateral. If you’re applying for a secured loan (more on that below), the lender will want to know more about the asset you’re offering. Collateral can include physical assets, like a home or car, and financial assets, like retirement or investment accounts. 

While getting a loan online can usually be achieved in a couple of clicks, shopping around and researching before agreeing to a lender can save you time, money, and stress. Here’s why: 

Not all online lenders are the same. Some might include more fees or offer slightly lower interest rates than their competitors.

It’s worth reaching out to different lenders to see what rate they’re willing to offer and what fees may come with the loan. 

The more research you do and lenders you contact, the more you’ll understand the terms of an online loan. It’ll be easier to spot which lenders offer less than favorable terms for you. These could include ballooning interest rates, hefty late penalty fees, or a higher interest rate than average. 

It’s possible to apply for an online loan, even with bad credit. As mentioned above, the lower your credit score, the higher your interest rate is likely to be. 

But some lenders are willing to work with borrowers with bad or poor credit. If your credit score is less than ideal, take the time to research loan terms across lenders, and you may find some more favorable than others. 

While something like a personal online loan can offer immediate relief from credit card debt, this may not be the best choice. While you may be stressed, take the time to consider your options before agreeing to a loan. Keep in mind that taking on more debt, even at lower interest rates, can add up and cause more problems. 

Before the days of online loans, you’d have to shuttle across town to different lenders to get different quotes. Now, all it takes is uploading your information and a few clicks to get offers from lenders. 

Taking the time to shop for the best rates can be a breeze and could save you money over the life of your loan.

Start by researching the reputation of online lenders, including reading online reviews and using other resources. You may find that some lenders are more responsive than others or more willing to work with borrowers with good to poor credit. Don’t be afraid to schedule calls with online lenders. 

If you decide to get multiple loan offers from online lenders, compare annual percentage rates (APRs) or interest rates correctly before deciding. While people use the terms interchangeably, these percentages are different. 

The interest rate of a loan will always be lower than the APR. The APR includes the other fees you’re expected to pay over the life of the loan, so this percentage will always be bigger.

When comparing online loans, be sure to compare interest rate to interest rate or APR to APR to determine which lender is offering the best rates. 

Interest rate and APR aren’t the only figures and fees to watch out for. Take a look at the loan agreement, which would include these common fees and penalties:

• Application fees come into play before you even get a loan offer. Some, but not all, lenders will ask applicants to pay a small fee before processing their loan application. 

• Origination fees occur once your loan is approved and the money is sent to your account. These fees are typically a percentage of the total amount borrowed. When you begin to repay your loan, this fee will be rolled into the monthly payments, meaning you’re also charged interest on this fee. Origination fees are typically 1% to 6% of the loan amount. 

• Prepayment penalty. Not all lenders include prepayment penalties, but if you plan to pay your loan off early, check for this fee. Some lenders will charge borrowers a fee if they pay their loans off early. A prepayment penalty could cost more than you’d save paying off a loan early, between 2% to 5% of the total amount borrowed. 

Online loan offers may look similar at first glance, but combing over the terms could save you money and a headache during the repayment process.

No matter what type of loan you’re shopping for online, you may notice different lenders offer different terms for their loans. Let’s list some common terms and structures you’ll encounter in the online loan process.

Online installment loans can be as simple as using a “buy now, pay later” option at checkout or as complex as an auto loan. Regardless of what you’re using the funds for, an online installment loan is a common type of loan where borrowers receive a lump sum of money and then pay it back in regular installments over time, sometimes with interest. An example of an installment loan is a mortgage on a house. 

The difference between secured and unsecured loans all comes down to collateral. 

With secured loans, a lender asks that the borrower tie a valuable asset to the loan. That could be a home, car, or co-signer’s property. However, if a borrower defaults on a secured loan, the lender can seize the collateral as payment. 

Unsecured loans are not tied to collateral. Instead, lenders determine a borrower’s eligibility on creditworthiness and other factors. 

“Fixed” and “variable” refer to the interest rate at which the borrower will repay the loan. 

In a fixed-rate loan, the borrower agrees to pay the same interest rate over the life of the loan. This can simplify budgeting repayment since the monthly payment will remain the same. 

A variable interest rate loan means the monthly payment can change over time. When interest rates decline, a borrower might have a lower monthly payment. However, when rates rise, they’ll likely pay more each month. The payment won’t be as consistent as a fixed-rate loan.  

Payday loans are known for short repayment terms, low limits, and high-interest rates and fees. Typically, lenders choose payday loans when they need money fast and have limited options. 

When payday loans are issued, their due date often coincides with the borrower’s next payday. At that time, the loan is due in full, including interest and fees. Payday loans are typically granted for small balances, often no more than $500 per loan. But, even with the small amount, the fees attached can be significant, generally charging borrowers a percent or dollar amount for each $100 borrowed. 

If the borrower can’t repay the loan at their next payday, they’ll be slapped with late payment and rollover fees. The loans can quickly balloon. According to Consumer Financial Protection Bureau research, four out of five payday loans are rolled over or renewed. 

Borrowers should only consider a payday loan if they have no other options and are certain they can repay it within the next pay period to avoid large fees.    

Online loans can be fast, easy, and mean borrowers don’t have to leave the comfort of their couch for financing. 

However, these benefits do come with drawbacks. Namely, online loan scams. Avoid the following so you don’t fall prey to unsafe online loans:

• Calls or texts offering online loans. Often, these are scams. Unless you’ve contacted a lender and they’re following up with you, texts and calls out of the blue often signal scammers. 

• A guaranteed loan with no credit check. If a loan’s terms sound too good to be true, including no credit check or loan requirements, it’s likely predatory or a flat-out scam.  

• The lender has no state registration or accreditation. Check whether the lender you’re working with is registered with the state. You might want to avoid working with them if they don't have a license. 

• Bad user reviews. See what other borrowers are saying before agreeing to a loan. 

Ready to start the online loan application process? Here’s what you can expect. 

Before asking for money, you should know how much you need. Take a close look at your numbers and devise a ballpark sum you want to ask for from the lender. 

Prequalification isn’t the same as preapproval, but the process can give you insight into the likelihood of your approval. 

To prequalify for a loan, borrowers send the lender some basic financial information, not including tax information. From there, the lender performs a “soft” credit inquiry, which doesn’t impact a borrower’s credit score like a “hard” credit inquiry can.  

Once approved, the lender can provide a rough quote of the types of loans and terms you qualify for. However, these terms and rates are not binding. The borrower has to go through a more rigorous preapproval process to lock in those numbers. 

Prequalification can provide insight into the rates you’d qualify for but doesn’t require the heavy lifting of a formal preapproval process. It’s important to thoroughly research a lender before sharing any personal information. 

With loan offers in hand, it’s time to consider the terms, fees, and rates each lender offers. Don’t be afraid to contact the lenders with follow-up questions if needed. 

The best online loan differs for every borrower and might not come down to just interest rates alone. The lender's experience, in addition to fees and policies, will likely impact the decision. 

When you decide which loan is right, it’s time to submit the application and kick off the lending process formally. This will include more back and forth between you and the lender and could require even more paperwork. 

While applying for a loan online doesn’t require leaving the house, it’s still worth window shopping before you choose an offer. Reviewing the terms of a loan can help you score the lowest interest rate, save on fees, and find a lender that fits your needs. 

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