It doesn’t take much to run into a cash crunch. Maybe you need to fix a flat tire, take your cat to the vet, and pay an unanticipated parking fine all at once. Even an emergency fund — which should be big enough to handle between three and six months of living expenses — may be no match for a series of unexpected emergency expenses.
If your savings are low, an online line of credit or loan may act as a financial safety net in your time of need. But can you trust just any online personal loan or line of credit company to do the job?
Short answer: no.
Not when rates, terms, and conditions — which impact the true cost of any loan — may vary drastically between online loan lenders.
That’s why it’s important to compare your options critically before you apply for a loan with a financial institution. A little bit of proactive research can give you a chance to avoid unnecessarily expensive loans. And, it just might uncover an online loan company that offers a product specific to your situation.
Here are a few tips to help you do just that.
1. Choose Between a Personal Loan or Line of Credit
Online loan companies provide a variety of products — each one with different purposes, pros, and cons. After deciding you want to borrow from an online lender, your next step in the borrowing process is choosing what kind of online loan best suits your needs.
Broadly speaking, your biggest decision will involve choosing between a personal loan or line of credit. While a line of credit can still be considered a personal loan, there are some important distinctions between it and certain other types of personal loans. Which one you choose will influence how you get your funds and how you repay them.
With an online personal loan like an installment loan, you receive your funds as a lump sum of money, and you must repay it along with any applicable charges over a fixed term. If you need more money after you pay off your loan, you must reapply.
Want to learn more about how a personal loan may be able to help you? Click here!
With an online line of credit, you won’t receive your funds all up front. Rather, you’ll get access to a credit limit you may use “on demand”, drawing funds up to this limit as you need them. As you pay back what you use, and any applicable interest and/or fees, the amount will be available to borrow again without needing to apply for a new loan.
Like any financial product, there are many pros and cons of an online line of credit that you must consider before borrowing. Compare them with other online loans to make sure you have an understanding of which one makes sense for your situation.
Generally, a personal loan may be a good option if you’re facing a one-time expense and you know exactly how much it will cost you. A line of credit may be a good idea if you want to remain flexible or if you aren’t sure of your final cost.
Nevertheless, each situation is unique, and it’s up to you to decide if a personal loan or line of credit works best.
2. Ask a Friend
Do you know a friend, family member, or co-worker who faced their own emergency recently? Ask them how they covered their unexpected expenses. If they ended up borrowing money online, they may provide valuable insight into online personal loan lenders.
Even if they don’t have a lender they would recommend, they may have a lender they say you should avoid. They may even shed light on the whole process, so you won’t feel like you’re going into it totally blind.
3. Research Online for Reliable Loan Companies
A reliable online loan lender makes it easy to learn about their products. They should have an online presence, and if they don’t, stay clear!
Once you have a list of online lenders, visit each of their websites. Here you’ll find important information about the kinds of products they offer and at what rates.
But don’t stop there.
A company’s website only affords you one, highly curated view of their services, which may not be enough to make an informed decision. To fill in any missing information, turn to third-party sources like CreditKarma, Google reviews, and TrustPilot.
These sources may have reviews left by previous customers, giving you an insider’s look at how your shortlist of online loan companies treat their borrowers.
4. Determine the Cost of Your Loan
Interest and fees are often a normal part of borrowing money, online or otherwise. When you take out a loan, you’ll always end up paying back more than the amount you borrowed, so it’s important to understand how much your loan will end up costing you in the end.
What those interest rates and/or fees wind up being can have a huge impact on the cost of your online loan or line of credit. The higher it is, the more you will end up owing — even if you receive a relatively small loan or line of credit limit.
Learn more about lines of credit and how they may be able to help you get the funds you need!
The cost of your loan depends on a variety of factors, but your credit score is sometimes a tool that financial institutions use to help set your rates. Your score is meant to show your history as a borrower, so if you have a good credit score, you may be able to secure better rates. However, with some financial institutions, interest will be charged as a flat rate depending on your outstanding balance.
Checking your credit before you borrow is a smart financial move. Reviewing your consumer credit file comes with the following three perks:
- You may get a better idea of what sort of rates you might expect based on your credit score.
- It also gives you a chance to spot any errors or inaccuracies dragging down your score unfairly. If you do spot something fishy, don’t delay finding out how to fix errors on your report. The faster you address these errors, the faster they may stop impacting your borrowing options.
- Checking your credit reveals your borrowing behavior to the harsh light of day. If you don’t like what you see, take it as an opportunity to make a change. These 5 ways to start building your credit history may not change the rates you receive if you need to borrow immediately, but they offer healthy credit habits that may pay off in the future.
5. Understand Eligibility Requirements
Experian’s state of credit report in 2020 shows the average VantageScore credit score was firmly within a good rating[1].
This is great news for a lot of borrowers. But the nature of averages means there will be some borrowers who fall below this rating.
While your score is important, it may not always be a determining factor in your online loan. Some online loan companies may look at other financial details to make a lending decision, offering an online loan or line of credit for people with bad credit.
These factors may include the following:
- Debt to income ratio
- Employment history
- Income and pay schedule
- Location
Make sure you know what they are — whatever it may be. Understanding what online personal loan companies expect from their borrowers may help you avoid applying for something you have no hope of qualifying for. You can focus on online line of credit and loan options that you have a fighting chance of being qualified for instead.
6. Sniff Out Other Fees and Charges
While interest may be the biggest fee impacting the cost of your online loan or line of credit, it’s rarely the only one. Some online loan companies may also apply fees and/or other charges.
Keep an eye out for what these may be, as they may change how affordable your online line of credit or loan ends up being. In many cases, these fees will be above board, but checking gives you a chance at identifying potential hidden fees.
Some online lending companies may charge:
- Additional payment penalties: Online lenders want you to pay back your loan or line of credit, but some may penalize borrowers if they repay it early. Here at CreditFresh, that’s not the case. We allow borrowers to make additional or early payments to their Line of Credit with no penalty.
- Late-payment fees: Movie rental places used to do it, the library still does it, and so do many online loan lenders. Being fined for being late is nothing new. If you miss a due date, you may incur late fines.
- Processing fees: This charge essentially amounts to an admin fee for processing your payments during your term.
- Origination fees: Some online loan lenders may apply additional fees to process your loan[2].
These are just some of the most common charges you may see in addition to finance charges. But this list may not cover them all.
Read your loan agreement thoroughly to catch any charges. If you spot something that doesn’t make sense, ask the financial institution to find how it works with the online loan or line of credit before you sign along the dotted line.
7. Understand Your Repayment Terms
Your loan agreement is an important read for another reason: understanding your repayment schedule. This part of your contract outlines how much you can expect to pay and when.
These details will hinge on whether you opted for a personal loan or line of credit, but there may be other factors involved.
Online loans come in all shapes and sizes. With certain types of loans, you may expect a shorter term than if you borrow an online installment loan. If you draw against an online line of credit, you may receive a periodic statement that includes a minimum payment.
The Big Takeaway
When it comes to choosing from online lending companies, don’t make an off-the-cuff decision. Winging this choice invites a lot of things to go wrong — from applying for something you don’t qualify for to locking into a loan with high interest rates you can’t afford.
Your finances deserve a critical look at your options; it’s the only chance you have of finding a loan that fits your budget.
Don’t stop here in your financial literacy education. For more financial resources from CreditFresh make sure to check out the rest of our blog. And if you have any questions about a Line of Credit through CreditFresh, get in touch with our Customer Service — we’re always happy to help you in any way we can!
Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see CreditFresh’s Terms of Use.
[1] https://www.experian.com/blogs/insights/2020/10/state-credit-2020/
[2] https://www.nerdwallet.com/blog/loans/what-is-an-origination-fee/
