The increase in online lending since the 2000s has made unsecured personal loans more accessible to people seeking funding for things like home improvements, debt consolidation, or vacations, just to name a few.
Online lenders have been embraced particularly by Millennials and GenZers, generations that are no strangers to technology—financial technology in this case—and disrupting traditional industries. For prospective borrowers of any age group, the convenience of applying for a personal loan online can be an advantage over a more traditional process.
Here are some advantages of personal loans from online lenders and when a traditional bank might be a better option:
Convenience
The convenience factor may just top the list of advantages of getting an online personal loan. Younger generations of consumers might be drawn to a process that incorporates the technology they’ve grown up with and are comfortable using.
Indeed, Millennials are the generation with the fastest growing levels of personal loan debt, with an increase of 44% over the last five years. This generation also tends to be selective about the source of its loans, too, often choosing a tech company over a nationwide bank.
Online lenders often have a streamlined application process that might appeal to people of any generation who are comfortable with technology. Online loan applications can be completed from anywhere a prospective borrower has an internet connection, preferably secure.
Online lending websites often have thorough lists of Frequently Asked Questions (FAQs) to give consumers as much information as possible without the need to travel to a brick-and-mortar bank branch.
Competitive Rates
The lack of brick-and-mortar locations is a reason that online lenders are typically able to offer competitive rates. Without physical bank branches to maintain, their overhead is likely to be less than a traditional bank’s.
Some online lenders, however, may try to generate profits by charging fees. When shopping around for personal loan rates, considering all fees when calculating the cost of the loan, including origination fees, closing costs, along with any other fees charged, is a good basis of comparison.
Quick Turnaround
Some online lenders are able to offer preapproval to prospective borrowers with just a soft inquiry on their credit report that won’t affect their credit score1. One benefit of knowing quickly what rate might be offered is being able to compare rates among multiple lenders to find the one that will be the best fit.
After the application and loan approval, some online lenders distribute loan funds in as quickly as a few days. For people who need access to funds quickly, this could be the determining factor in choosing a lender.
Differing Criteria
Someone who has not built a credit history might have difficulty being approved for a personal loan. They might be tempted by predatory payday lenders, but a better option may be considering some federal credit unions that offer payday alternative loans. Fees and interest rates are capped on these loans, and, in some cases, credit checks are not done.
There are also online lenders that are willing to look at factors other than credit score in determining approval for a personal loan. Some lenders cater specifically to underserved populations , while some look at an applicant’s education and occupation to determine approval.
What About Traditional Banks?
Even though online lenders are well established in the financial world, traditional banks still make sense for some people or some financial needs.
For people who prefer working with a lender in person, a traditional bank or a credit union is probably ideal. If there is already a relationship in place with a particular financial institution, it may be advantageous to build on that and get a personal loan rate quote from that lender.
Specific types of loans might be easier to get at a traditional bank than an online lender. For example, a personal loan cannot be used for business expenses, so someone looking for funds for their business might be better off applying for a small business loan with a traditional bank.
In some situations, a personal line of credit (LOC) might be a better option than a personal loan. Though online lenders are beginning to offer LOCs, they are more likely to be offered by banks or credit unions.
Since a personal LOC is typically unsecured, a lender’s criteria might focus on an applicant’s credit score, payment history, and overall financial health when determining approval. The applicant’s ability to repay the loan becomes the basis for approval in the absence of the need for collateral, as with a secured loan.
From Disrupting to Redefining
Online lenders and traditional financial institutions are realizing that they can meet the needs of more consumers if they work together.
Today’s modes of banking may be less about disrupting the status quo of lending and more about finding a new definition of banking as a whole. Those same Millennials and GenZers who might have started a disruption in the financial industry may also be the ones to usher in new ways of doing business.
The Takeaway
No matter what the money will be used for, comparing rates and lenders is always a good idea. The proliferation of online lenders certainly provides consumers with more options, but some financial needs might require the services of a traditional bank.
Something else to consider is how much of a loan you can afford and if a personal loan makes sense for your particular financial needs and situation.
SoFi unsecured personal loans have low, fixed rates and no fees required. Checking your rate takes just 1 minute. With lower interest rates than credit cards, a SoFi Personal Loan may be the right option for you.
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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
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