Are Online Loans Safe?
A little research can lead you to the perfect online lender for you.
The first bank in the United States opened in Philadelphia in 1791. Until recently, getting a loan worked only one way: Answer.
Today, you have other options, including online lenders with less overhead and potentially lower interest rates. But are online lenders safe? Here, we’ll take a look at how you can tell if you’re dealing with a reputable lender, and how to spot a bad player a mile away.
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Why Consider an Online Lender?
Most of the online lenders focus on a particular type of loan, such as personal loans. They are also more likely to consider a candidate than a traditional lender might reject. Since online lenders have lower overheads, highly qualified borrowers have access to perks like low interest rates and quick, 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 are willing to accept.
Because so much of the online loan process is automated, it’s a great way to complete the underwriting process and receive funds quickly.
Finally, while traditional financial institutions may take a narrow view of the clients they wish to work with, there is an online loan available for borrowers of all kinds, including those looking for a personal loan for borrowers with bad credit.
But is it safe?
The short answer is yes, online loans are safe. This is because legitimate lenders must abide by the same strict lending rules as traditional banks. There are big names like Discover and Marcus from Goldman Sachs and recognized industry leaders like SoFi, Avant, Upstart and Payoff. That’s not to say there aren’t bad players, but bad guys are pretty easy to spot.
How to control a lender
If you come across an online lender you’ve never heard of (or want to dig deeper into a name you recognize), these five steps can help you get a feel for how reliable a lender is:
1. Check the federal registration
Legitimate lenders are required by the Federal Trade Commission (FTC) to register in the states in which 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 license”.
For example: “State licenses obtained”. You may need to scroll down the page, but you can usually find a page that lists the business registration numbers. Otherwise, ask the lender in which states they are registered to operate and ask for their registration number.
2. Call your state attorney general’s office
The job of a state attorney general is to protect your interests. Call them to make sure the lender you are considering is registered with the correct agencies. All you need is the name of the lender.
3. Find their rating from the Better Business Bureau (BBB)
Granted, most of what you read about a business on the BBB website is written by disgruntled customers. Still, reviews (and ratings) can give you an idea of what to look for. Other sites like Yelp, TrustPilot, and Google Reviews may also offer an overview.
4. Ask your friends and family
Your friends and family are unlikely to cheat on you. If you are close to someone who has taken out a personal loan, ask them about their experience, including who they have worked with and if they would borrow again.
5. Perform an online search
It is difficult for a bad player to keep personal loan scams out of the news. A simple Google News search should reveal any issues with the business in question.
How to spot a skunk
Certain behaviors should automatically trigger red flags. For example:
- A lender puts pressure on you to accept a loan.
- You cannot find information about them online.
- They guarantee that you will be approved regardless of your credit history.
- They ask for an upfront payment.
- They contact you (by email, text or phone) to ask if you want to borrow money.
- They keep contacting you, even after you tell them no.
- The attorney general’s office in your state shows no evidence of them.
The bottom line
Although there are bad apples, the majority of online personal loans are safe and reliable. As long as you focus on identifying red flags and doing your homework to verify a lender, you’re as safe as with any bank or credit union. Since 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 making money.
The Ascent’s Best Personal Loans for 2021
The Ascent team has scanned the market to bring you a list of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate, or need extra cash to make a big purchase, these top choices can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.