Think there's only one kind of an online loan? Think again!
Today, we will explain the differences between some distinct loans available online.
Getting cash loans online can sometimes be touted as the easier, faster, and more convenient way to apply for a loan. And this may be true. On a financial institution’s online platform, you can expect a quick application process without having to trek to a storefront.
But amidst all this talk about some benefits of borrowing money online, it may be easy to think that all online loans share the same purpose. This can’t be further from the truth. In fact, there are a lot of different kinds — from open-end line of credit loans to closed-end installment loans.
Not sure if you can spot the difference?
Ordinarily, this gap in your knowledge may not matter. But if you’re about to apply for a line of credit or a loan, not taking the time to understand the terms could affect your finances. You can’t make an informed decision unless you know the full scope of what you’re signing up for.
That’s why we’re reviewing the differences between some online loans. After reading some facts, you may have a better chance of choosing to apply for the best online loans for your situation.
Unsecured Personal Loans
This may be one of the most popular online loans out there, partly because of their versatility. People can use them to either make big purchases or cover unexpected expenses, depending on the type of loan. However, there are certain types of online personal loans that are only intended to be used for unexpected emergencies, so it’s important for you to understand the intended use of each particular loan.
With unsecured as part of its name, this means that this credit product does not require collateral. This may make them slightly riskier from a financial institution’s perspective, so you may see high interest rates and/or fees as a result.
Overall, rates, terms, and conditions will vary depending on multiple factors, but it’s likely one of the kinds of online loans with monthly payments. However, keep in mind that there are other types of pay frequencies as well, such as weekly, bi-weekly or semi-monthly and they may impact the due dates.
Secured Personal Loans
Secured personal loans can also be used for a variety of purposes. The main difference is that they do require collateral. This means you’ll have to pledge something valuable that may be taken by the financial institution if you default on your payments.
Mortgages — which use your home as collateral — are probably the most well-known example of secured personal loans. But these products come in all shapes and sizes.
Some secured loan options may be a viable alternative if bad credit makes it hard to qualify for unsecured products. With collateral on the line, a financial institution reduces some of the risk it takes on during the lending process. Just remember that with bad credit, it’s still possible to get denied for a secured loan.
Weighing the pros and cons of online loans before your apply for one is an important part of the process. As you’ll see below, each option may have its advantages and may have some things you should look out for. It’s up to you to find out which loan is right for your situation.
Some of the types of loans listed below could either be categorized as secured or unsecured loans.
1. Debt Consolidation Loans
A debt consolidation loan rolls multiple online loans with monthly payments into one new personal loan.
Debt consolidation loans don’t cross out what you owe; all they might do is simplify your debt payments under one series of payments.
2. Installment Loans
Online installment loans are a fixed amount of money that you must repay, plus interest and/or fees, over a series of payments. While many are online loans with monthly payments, the frequency of your payments may vary depending on how often you’re paid.
Depending on the type of loan, the cost of some installment loans may be cheaper than certain more expensive loan options, but it doesn’t necessarily mean they’re affordable. This applies to any loan or line of credit you’re considering. No matter what you need, always compare your payments and the current rates with your budget to confirm it’s something you can handle.
3. Line of Credit Loans
An online line of credit is the first and only kind of open-end loan on this list. The others so far have been examples of closed-end loans.
What’s the difference? An open-end loan doesn’t have a fixed end term, while a closed-end one does.
Let’s look at the installment loan, for example. It’s a closed-end product. Once you make your final payment, you can’t access these funds again. The only way to get more money is by reapplying for a new loan.
With an online line of credit, you may receive a pre-determined amount of money or limit that you may use on an as-needed basis. As one of the online loans with monthly payments (or a different pay frequency), you’ll receive a billing statement that’s based on what you use, not your entire credit limit.
As you pay down your outstanding principal balance on your line of credit, you can make draws from your available credit.
This revolving pattern of drawing, paying off, and drawing again may make an online line of credit convenient and accessible.
4. Title Loans
With title loans, you’ll need to provide collateral (an asset) in order to qualify. This means that in case you start to miss payments or default on your loan, the financial institution providing the loan may seize that collateral in order to recoup the loss.
A fairly common example of a title loan is a car title loan. They may be an option if you own your vehicle. It allows you to borrow a portion of your car’s value, which is usually up to 25 percent of its total value.
There may be even more at stake with this option, as title loans require you to use your vehicle as collateral. This means that if something prevents you from repaying what you owe, your financial institution may use your vehicle as payment.
Considering a Cosigner?
If you can’t qualify for a loan on your own due to your credit history, cosigner loans may be an alternative way to get cash loans online.
A cosigner is a friend or family member who agrees to pay off your loan if you can’t. If something prevents you from paying your online loans on time, they’re in the game and responsible for paying it in your place.
Applying with a cosigner who has a good credit score may improve the chances you’ll be approved for certain popular online loans, as you’ll get to piggyback off their impressive borrowing history. Depending on their history, it may unlock larger borrowing amounts and more favorable terms.
Rates May Vary with Each Option
Whether you end up requesting an online line of credit or a loan, your rates, terms, and conditions may vary by your potential financial institution. Your credit history may also play a role in the amount you qualify for.
Don’t know what your credit report looks like? Go to AnnualCreditReport to get your free report. You’re allowed one report from each of the three major credit reporting agencies every 12 months. This gives you three chances to check in with your report each year. Take advantage of it. It’s important to check your report regularly, as it’s a chance to see where you stand financially.
It can also give you a good idea of what sort of cash loans online you may qualify for. If you have good credit, you may qualify for a variety of online loans at relatively affordable rates. But if you have bad credit, you may see your selection decrease as the rates increase.
In an emergency, use this knowledge to narrow down your search and apply for only the loans you think you have the best chance of being approved for. This way, you can focus on applying for a loan or line of credit for people with bad credit and skip over financial institutions that may deny you funding based on your credit score.
This may save you time and frustration, as you won’t be waiting on a financial institution only to hear “no”. Instead, you may have the option to work with institutions that may approve you on a timeline that works with your emergency.
Checking your score even when you don’t need to borrow money is a good idea, too. If a peek at your score shows it’s lower than you want, you have a chance to work on this part of your finances before you need to apply for a loan in the future.
The Popular Choice Isn’t Always the Right Choice
Just because a lot of people may use these online loans, it doesn’t make them the best online loans for your situation.
If one kind of loan from this list catches your eye, take time to shop around to see what sort of rates, terms, and conditions you get as a borrower. Only then will you know if what’s popular is also what’s right for you.
More still, you may have a better chance of finding the loan or line of credit with the cheapest rates available for your profile.
So, take the time to shop around. Find out how a Line of Credit through CreditFresh works and compare them to the others on your list. Researching rates and terms before you request a loan may take more work up front, but it may pay off in the long run.
And if you have any questions that didn’t get answered here today, get in touch. By phone or email, we’re here to answer your questions about our services.
Posted in: Online Loans