If you’ve ever needed to borrow money—for a car, home renovations, or just to pay short-term expenses—then you’ve probably searched online for the best loan options. And you undoubtedly found hundreds of online lenders ready to let you borrow money very quickly. But some of these online cash loans sound too good to be true—and that’s because they are.
As online lenders gain popularity, the market has also seen a boom in predatory loans. Essentially, less scrupulous lenders may tempt you with fast approval and quick cash, but then hit you with sky-high interest rates and terrible loan terms that leave you owing more than you can repay. The ease with which you can borrow money online makes it particularly hard to know which online lenders are legitimate and which aren’t.
The online loan marketplace is so rife with predatory lenders that one NPR reporter filled out a quick loan application with entirely fake information and was still approved. Because of that application, the reporter was then pre-approved by other online lenders for even higher loan amounts. It’s not hard to see how this could easily get out of hand.
You don’t want to end up owing more than you bargained for. Before you borrow money online, here’s some good things to know about online lenders and how to spot the sketchy ones.
Why Have Online Lenders Grown in Popularity?
According to a report from TransUnion , online lenders accounted for just 4% of personal loan balances in 2012. However, as of 2017, 32% of personal loans were taken out from online lenders. And that’s not going to slow down soon. The U.S. Treasury Department studied the online loan marketplace in 2016 and estimated that online lenders could originate $90 billion in loans (including car loans and mortgages) by 2020.
Not all of this growth is bad or predatory. For business owners, online lenders have provided an important new avenue for capital on their small business loans. For borrowers with bad credit, online lenders have been another source for borrowing money when needed.
The growth of financial technology has also made it possible for online lenders to use a different approach when approving borrowers’ applications. Some consider your earning potential and cash flow, instead of simply looking at your credit report. Technology has also made it easier to get approved quickly—with some online lenders, the loan approval process can be completed in less than a day.
However, with the ease of online loan approvals and growth of online lenders, there has also been a rise in concern about regulation and predatory lending.
What Is a Predatory Lender?
Predatory lenders, or lenders with shady practices that take advantage of borrowers, have been around for years. Generally, a predatory lender charges massive interest rates that are sometimes even above the legal limit. Often a predatory lender simply ignores a borrower’s ability to repay the debt. These lenders target people who need cash quickly, offering things like payday loans or tax refund advances.
How do you know if you’re dealing with a predatory lender? For one thing, they may not provide adequate disclosures, so that they aren’t telling you exactly what you’re signing on for. They might charge inflated fees, especially upfront, and abnormally high prepayment penalties. Finally, they could encourage you to take out more than you should, or put your home or other assets up to secure a larger loan.
How Do I Know If an Online Lender Is Legitimate?
The first step is to check out the lender, before you apply for a loan and give them any personal information. When checking out the lender, The Better Business Bureau is a good place to start, though not all online lenders are listed there.
There are also federal regulations on lenders offering short-term or payday loans. Most legit online lenders will comply with these regulations. Word of mouth is also very helpful. Read reviews to get the true voice of the customer, and be sure to look at different social channels to gauge the kinds of experiences people have had. If you can identify patterns—positive and negative—it may make your decision that much easier.
You should make sure to avoid unsolicited loan approvals (ones you didn’t apply for), and don’t agree to loan terms that you know you can’t afford or repay. You shouldn’t have to pay any large upfront fees before your loan is disbursed. It’s also important to read online lender reviews and consider if the online cash loan you’re being offered is too good to be true.
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