Online Loans: Your Bank No Longer Rules the Lending World

Loan Types and What to Consider Before Taking Online Loans

Whether you’re in a financial bind, need to make a large purchase or need quick cash for some other situation, online loans can help out.

In recent years, the lending-industry landscape has changed significantly. As a result, consumers can choose from many types of loans from various sources. Online loans are increasing in popularity, so your bank is no longer your only option. Consumers can now apply for loans online and get approved without setting foot inside a brick-and-mortar bank. Knowing the different types of loans available allows you to better understand all your options and choose the loan that’s best suited for your situation

Secured Loans Online

online loans A secured loan one that you take out against something you own, generally a vehicle or a home. The asset is considered collateral, and if you default on the loan, the lender will seize the collateral to help pay off the loan.

Generally, the interest rate on a secured loan is lower than an unsecured loan because the risk is lower. In fact, you may even be able to negotiate a lower interest rate on a secured loan. Consumers with better credit ratings also tend to get better terms and interest rates on secured loans, as the risk to the lender is lower. Furthermore, a secured loan may also have more flexible repayment terms.

Examples of secured loans include:

Auto loans
Recreational vehicle loans
Mortgages
Home equity loans
Home equity lines of credit

Unsecured Loans

An unsecured loan does not involve any type of collateral. With this type of loan, the only recourse the lender has if you default is to freeze your account and attempt to collect the debt using a debt collection service. This will also cause damage to your credit report and possibly prevent you from taking out any other loans until this one is resolved or falls off your credit report.

The lender generally ties the amount of money you can borrow using an unsecured loan to your debt-to-income ratio, assets and your credit history. Because the lender is taking on more risk, an unsecured loan usually carries a higher interest rate.

An unsecured loan may be referred to as a personal loan or signature loan. These types of loans are generally reserved for those with above-average or higher credit ratings.

Examples of unsecured loans include:

Personal lines of credit
Personal loans
Student loans
Credit cards or other types of revolving credit

Different Ways to Borrow Money

If you need to borrow money, there are ways to do so.

Line of Credit

A line of credit works like a credit card, as the lender gives you a maximum balance., and you can borrow as much as you would like from the line of credit up to the maximum amount. Unlike a credit card, though, there are different phases for a LOC. The initial phase is the draw phase — this is when you can actively use the cash in the LOC. Then comes the payment phase, which is when you start repaying the money you drew. In between these phases, there may be an interest-only phase, which is when you pay only the interest on the amount you have drawn from the account.

Based on how the line of credit is arranged, you may be able to write checks on the account or it may be linked to your debit card. A line of credit may be either secured or unsecured.

Conventional Loans

Conventional loans are generally used for large purchases, such as real estate or vehicles. However, it could also include a home equity loan or personal loan.

The amortization and repayment terms for a conventional loan are consistent and predetermined, so you know precisely what your monthly payment will be and how long you have to pay. A conventional loan may be secured or unsecured.

Payday Loans

Payday loans are also known as cash advances. Consumers often use these loans as quick solutions for emergencies. This type of loan is intended to be used as a short-term solution and is secured against your next paycheck.

Bridge or Interim Loans

A bridge or interim loan is also sometimes referred to as a single-payment loan, and borrowers generally use it as short-term temporary financing. Borrowers usually pay off a bridge loan in one lump sum rather than in scheduled installments. In some cases, a bridge or interim loan may be used to purchase real estate, including when building a new home.

Applying for Personal Loans Online

Before applying for a personal loan online, it’s important to make sure you understand the application process. Not all personal loans require a credit check. For instance, some payday loans or cash advances don’t require a credit check because your next paycheck is used as security.

In cases where your credit history is a factor, you’ll want to get a copy of your credit history before submitting a loan application.

Take the time to carefully review your credit report from all three major reporting agencies, TransUnion, Experian and Equifax, and resolve any flaws or errors. You should also review your credit score. Keep in mind that lenders that require a credit check may also have minimum credit score guidelines. If you don’t meet that minimum, then there is no reason to apply.

The decision to apply for a loan is a big step. Prior to moving forward, make sure you fully understand all your lending options, and the advantages and disadvantages of each type of loan.