Blog Borrowing Yes, online loans are real and here’s how they work

Yes, online loans are real and here’s how they work

date June 9, 2020 time 4 min read 870 views

Look up online loans on Google and you’re going to see a list of search queries like, “Are online loans safe?” or “Are online loans real?”

It’s more than reasonable to be cautious in this day and age — after all, you’ve probably heard the horror stories of money lost online to phishing and other scams.

But the fact is, online lending is a multibillion-dollar industry and it didn’t come this far just through scams. Even so, it pays to do your research first and understand exactly what you’re getting yourself into when you look for loans online. I’m going to help you speed up the process with a brief crash course on the different types of instant personal loans online.

Online bank loans

First up, we have the traditional option — going through a bank or financial services provider to get an unsecured loan that you pay back over a long term.

To get one, you’ll need to fill out an application form with information like your address, salary, and other financial details. They ask this to work out your credit score, which is a decisive factor in whether you get a loan or not. It also impacts how much you can borrow and the precise terms of repayment.

Most companies use the FICO credit scoring system. It gives you a rating between 300 and 850 based on your financial history. You want your score to be as high as possible, but a score of 660 or above is considered ‘good — meaning that if you’re in that bracket, your loan application is likely to be approved and the interest rates won’t be extortionate.

To illustrate the impact credit scores can have, let’s look at LightStream, a division of SunTrust bank. For a two-year debt consolidation loan of $10,000, you’ll have to pay an interest rate between 5.95% and 15.99% based on your credit score rating — that’s a huge difference.

You can check your credit score at myFICO.

Payday loans / Cash advances

If you need fast cash to pay a bill and lack a credit score that allows you to get a good loan, often your only option is a Payday loan.

I’d like to preface this section by saying that these are not a type of loan I’d recommend unless you’re:

  1. Truly out of options.
  2. Completely understand the loan terms.
  3. Are 100% sure you can repay on time.

Payday loans are short term loans with a due date negotiated between you and the lender. Many of these are for terms of two to four weeks. The maximum loan value you can obtain depends on the state you’re in, though most won’t permit much over $500.

It’s not difficult to get a payday loan. All you need is proof of ID (like a driver’s license), your bank details, and proof of salary (your last pay stub, for example), and once approved, you’ll have the money in your account the next day.

Here’s the catch.

First, the fees and interest on payday loans are high. While many states limit what these companies can charge, you should expect to pay at least $15 in interest for every $100 borrowed. For a two-week loan, this would be the equivalent of almost 400% APR!

Second, missing a payment can have disastrous consequences for your credit score — you may need to take another loan to cover your original one, and before you know it you’re in the payday loan debt trap. Finally, simply taking one of these loans can negatively impact your credit rating if a lender gives you a hard credit check.

It’s also worth noting that payday loans are illegal in Arizona, Arkansas, Connecticut, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont, West Virginia, and the District of Columbia.

Peer-to-Peer loans (P2P)

Online peer-to-peer loans allow individual parties to lend money to one another. A P2P platform’s role is to provide a secure, trusted place where people who want a loan can be quickly and easily matched with those who are lending.

There are a couple of types of P2P loans, but you can generally separate them into two categories: unsecured and secured. Unsecured loans assess each borrower by their credit score (or an equivalent metric), so the interest rates on the loan can vary dramatically — but generally, a higher credit score still equals better terms.

Secured loans are quite different as they require the borrower to put up some form of collateral instead. When loans are secured, a background check doesn’t need to be as strict but the rates are usually lower.

On MyConstant, we don’t ask borrowers for a credit score. Instead, we require them to put up cryptocurrency as collateral. Collateral is effectively a form of insurance to give peace of mind to the lender. They know that there’s something that can be sold off to pay them back if the borrower defaults.

What’s next?

All in all, the type of loan for you depends on your financial situation, credit score, and what’s available to you.

As a borrower, you should ideally be looking for a loan with as low an interest rate as you can get, with terms that let you pay it back as quickly as you can comfortably manage. Always do your homework and find the terms that suit your financial situation.

Check our blog if you’d like to learn more about how to borrow money against your crypto


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Ian Haponiev

Ian Haponiev

In-house Journalist

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