A Beginner’s Guide to Online Loans

Published on April 17, 2020 by Daniel Azzoli

A beginner's guide to online loans

In an ideal world, there should be a financial plan: a well-balanced budget. It’s the blueprint to spending your money, making sure you can pay your bills, be prepared for financial emergencies, and maybe even have a little left over for something fun.

But here’s the kicker — personal finances may not always go according to plan. A sudden influx of unexpected bills and emergency repairs can throw your budget into a tailspin.

Enter a potential emergency rescue which is to get a loan online. Online loans may help you cover unexpected emergency expenses if you don’t have an ample cushion of savings in the bank.

What Are Online Loans?

In a nutshell, online loans refer to money you borrow over the Internet. They’re simply loans that you get online rather than in-person from a brick-and-mortar financial institution.

That’s not to say these brick-and-mortar financial institutions don’t offer online loans. In our glossary of terms, an online lender is defined as:

A lender that operates online and who may or may not have a physical storefront.

Plenty of lenders with brick-and-mortar locations offer cash loans online in addition to their usual suite of financial products that are available in-branch.

Nevertheless, there is a large number of legitimate online loan lenders. These financial institutions have no physical storefront, and all they offer are cash loans online.

How Do They Work?

Like most loans, an online loan starts with an application which requires you to share your personal information with a financial institution. Financial institutions may ask to see things like your full name, employment history, financial details, and Social Security Number to get a good sense of your financial health.[1] These insights help them determine your creditworthiness, or how likely you’ll handle their loan responsibly.

Until recently, the only way you could share this info was by visiting an established branch during its opening business hours. You would meet with a financial advisor, fill out forms, and go home where you’d wait to hear if you were approved, for days or sometimes weeks later.

You can still do that today, or you can work with online loan lenders that have made the borrowing process more convenient.

With a tablet, smart phone or computer at the ready, you can apply for a loan anytime and anywhere you have Internet. All you need to do is fill out an online application.

If you’re approved, you may receive and pay off your loan without ever having to visit a financial institution or ATM first. You’ll receive your funds as a direct deposit into your bank account, and you may set up automatic payments to come from this account once it’s time to repay.

What Types of Online Loans Can You Get?

Our definition from before describes the application process you may generally see — that is, going online to request money — rather than detailing the type of loan product you can borrow.

woman touching trackpad of laptop with right hand sitting next to table

That’s because there is not a single or standard type of an online loan. Loans of all shapes and sizes — with varying uses, loan amounts, rates, and terms — make up a diverse ecosystem of online loans: short-term, long-term, personal and business. There are even line of credit options that fit the bill.

Below, you’ll find some of the most common examples of online loans.

  • Title Loans: Title loans are also short-term, small-dollar loan that may be subject to very high interest rates and require collateral. This means you have to secure your loan with the title of your vehicle. If you default on your payments, your online lender may take your vehicle to recoup the value of your loan.
  • Installment Loans: Low- or high-interest installment loans arrive in one lump sum. But unlike some loans that are due back in one payment, you’ll pay back what you owe over a pre-determined series of payments (or installments). All told, it could take anywhere between a few weeks to even a few years to pay off.
  • Line of Credit Loans: Here’s how a personal line of credit works: rather than receiving all your funds upfront, if approved, you get a pre-determined line of credit limit that you may draw against as the need arises. Your payments are usually based on your use of your line of credit. For example, you may be charged interest/fees based on what you withdraw and not your overall credit limit.

What Are the Benefits of Getting Cash Loans Online?

Here are some of the perks you might enjoy if you need to get a loan online.

Easy Comparison

Shopping around for loans that suit your needs is a great idea, and this is true whether you get a loan online or from a storefront. But at least with online loans, it’s easier to compare your options side-by-side. Simply flip between multiple different online loan lenders’ or service providers’ websites to see how they measure up in real time.

Convenient Experience

By offering the convenience of requesting funds online, online loan lenders streamline the borrowing experience. You don’t have to travel to a brick-and-mortar location where you have to sign papers.

man and woman sitting next to each other in front of open laptop on table in front window at nighttime

Instead, you can fill out everything you need over a website. In some cases, these sites accept applications 24/7. This means you can apply on your own time, even if that’s in the middle of the night.

Speedy Process

Because so much of the process is automated, borrowing online sometimes works on a faster timeline. You may hear if you qualify in a matter of minutes, and if approved, you may receive your funds as early as the next business day.

The days of waiting for a check you have to cash are over. If you authorize direct deposit, an online lender can send the funds directly to your account. You may also set it up, so your payments are taken automatically from the same account.

Flexible Eligibility Requirements

Sadly, getting rejected for funds is one of the effects of bad credit, making it a challenge to find funding if you sport a less-than-perfect score.

If you have bad credit, you may be able to find lenders that offer loans to consumers with subprime scores.

While they may still check your score, they may round out your application, checking your employment history and income to determine your creditworthiness. Some lenders may also use alternative data from rent payments and utility bills to help make their decision.[2]

Look out for Potential Warning Signs

Online loans may seem like an attractive option thanks to their ease, speed, and convenience. But they aren’t necessarily the perfect solution to every cash-flow problem.

Before you get a loan online, pay attention to the following details.

Online Security

Sending your personal information over the web may seem like business as usual in 2020. But don’t take it for granted. If the data gets handled improperly, you may be at risk of identity theft and fraud.[3]

Here’s what to do if you already believe your personal information has been compromised. Otherwise, always check a financial institution has the appropriate security measures in place to protect your data at every step of the borrowing process.

Higher Rates and Fees

If you get an online loan or line of credit for bad credit, online loan lenders may charge you high interest rates and fees. They may also limit how much you’re able to borrow.

If interest rates or charges are high, a loan may be difficult to repay. Always check in with your budget to make sure you can afford to make all your payments by their due dates. You should also check with the financial institution to see if there are any penalties for paying off your loan earlier than the scheduled payments. If there aren’t and you’re able to do so, this may help to reduce how much interest you end up paying in the end.

smiling woman holding phone to her right ear and holding tablet in left hand outside

Are Online Loans Right for You?

Maybe you need a little extra cash to pay for an unexpected round of antibiotics after a tenacious cough turns into bronchitis. Or perhaps you need help buying a new tire after your old one suddenly blows on the highway.

If you don’t have the savings to cover an emergency expense or if things go unexpectedly and unabashedly wrong, online loans may be an option. They may be a  convenient, simple, and quick solution.

But not all online loans are affordable or secure. You won’t know until you shop around.

Do your homework and pay special attention to the rates and terms available for your financial profile. What’s more, only ever sign a loan contract if you know, without a doubt, you can pay back your loan on time. If you have any questions about what we do, get in touch today. We’re always happy to help.


[1] https://www.nerdwallet.com/blog/finance/lenders-credit-score-interest-rate/

[2] https://www.consumerfinance.gov/about-us/blog/using-alternative-data-evaluate-creditworthiness/

[3] https://www.nbcnews.com/better/business/6-common-habits-put-you-risk-identity-theft-ncna899251