by Dana George | Updated July 30, 2021 - First published on July 28, 2021
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A little research can lead you to the online lender that's perfect for you.
The first bank in the U.S. opened its doors in Philadelphia in 1791. Until recently, getting a loan worked in one way: You visited a brick-and-mortar bank, spoke with a loan officer, filled out an application, and waited for a response.
Today, you have other options, including online lenders with less overhead and potentially lower interest rates. But are online lenders safe? Here we'll cover how you can tell if you're doing business with a reputable lender and how to spot a bad player from a mile away.
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Most online lenders focus on a particular type of lending, like personal loans. They are also more likely to consider an applicant who a traditional lender might reject. Because online lenders have lower overhead costs, highly qualified borrowers have access to perks like low interest rates and quick and easy response times.
Not all online lenders fund their own loans. Some have partnered with traditional banks, while others use peer-to-peer lending, which involves investors funding loans based on the risk they're willing to accept.
Because so much of the online loan process is automated, it's a great way to get through the underwriting process and receive funds quickly.
Finally, while traditional financial institutions may have a narrow view of the clients they want to work with, there's an online loan available to borrowers of all kinds, including those in search of a personal loan for borrowers with bad credit.
The short answer is yes, online loans are safe. That's because legitimate lenders must meet the same strict lending rules as brick-and-mortar banks. There are big names like Discover and Marcus by Goldman Sachs and proven leaders in the industry like SoFi, Avant, Upstart, and Payoff. That's not to say there are no bad players, but the bad guys are pretty easy to spot.
If you run across an online lender you've never heard of (or want to do a deeper dive into a name you recognize), these five steps can help you get a sense of how trustworthy a lender is:
Legitimate lenders are required by the Federal Trade Commission (FTC) to register in the states where they do business. The easiest way to make sure a lender is registered is to type the lender's name into a search engine, followed by the words "state licenses."
For example: "Upstart State Licenses." You may have to scroll down the page, but you can generally find a page that lists the company's registration numbers. If not, ask the lender about the states it's registered to operate in and request its registration number.
The job of a state attorney general is to protect your interests. Give them a call to make sure the lender you're considering is registered with the proper agencies. All you should need is the lender's name.
Granted, most of what you read about a company on the BBB website is written by unhappy customers. Still, comments (and ratings) can give you a sense of what to look out for. Other sites like Yelp, TrustPilot, and Google Reviews can also offer insight.
Friends and family are unlikely to steer you wrong. If you're close to someone who has taken out a personal loan, ask about their experience, including who they worked with and if they would borrow from them again.
It's tough for a bad player to keep personal loan scams out of the news. A simple Google News search should turn up any problems the company in question has had.
Some behaviors should automatically raise red flags. For example:
While there are bad apples, the majority of online personal loans are safe and reliable. As long as you make a point to identify red flags and do your homework to verify a lender, you're as safe as you would be with any bank or credit union. Because online lenders have more flexible lending standards and can often beat the interest rates and terms offered by traditional lenders, you may even end up money ahead.
The Ascent team vetted the market to bring you a shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on The Ascent's top picks.
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