The ultimate guide to online loans—Access funds without falling for the payday trap
Need a quick personal loan but don’t want to schlep to the bank?
What about an online cash advance? And no, it’s not a scam. We’re referring to online loans—the way millions of Americans pay for emergency expenses, house renovations, and recreational investments.
For some who prefer traditional banking, anything online is met with a healthy dose of skepticism, but as digital transformation continues, instant online loans are becoming the norm.
If you want a more convenient way to borrow money, read on to learn about online personal loans, reputable lenders, and how they compare to payday loans.
The top five best online loan providers
Whether you're looking to consolidate debt, pay for a home improvement project, or simply cover an unexpected expense, these online loan providers can offer you the financial assistance you need.
1. Happy Money
Happy Money has helped more than 200,000 people obtain over $3.7 billion in personal loans. It offers fixed-rate personal loans to borrowers who want to consolidate credit card debt.
The company’s “Payoff Loan” combines multiple high-interest credit card payments into one monthly payment with a lower APR. Happy Money offers consolidation loans in 48 states, excluding Massachusetts and Nevada.
- Loan Amount: $5,000-$40,000
- Est. APR: as low as 11.75%
- Min credit score: 640+
- Best online loans for credit card consolidation
Avant, a personal loan lender founded in 2012, aims to improve borrowing for middle-income consumers. Backed by fintech investors, it has helped over two million people get funding.
This lender offers personal loans online for various purposes, such as medical bills, home projects, and unexpected expenses. All loans are fixed-rate so you can budget with certainty.
- Loan amount: $2,000-$35,000
- Est. APR: between 9.95%-35.99%
- Min credit score: 600+
- Best online loans for those with bad credit
LightStream provides fixed competitive rates and flexible terms, with no fees, charges, or early payment penalties. Their quick online loans can be used for anything from IVF financing to timeshare costs.
According to their Rate Beat Program, if you are approved for a lower rate from a competing lender, LightStream will offer you a 0.10% lower rate.
- Loan amount: $5,000-$100,000
- Est. APR: maximum rate is 29.9%
- Min credit score: unspecified
- Best online loans for large loan amounts
4. SoFi Personal Loan
SoFi offers instant loans online with competitive rates, flexible terms, and no hidden fees. You can pre-qualify for a loan in 60 seconds without commitment and choose from two to seven-year loan terms.
If you lose your job, SoFi will even modify your payments to ease your debt burden. As a trusted lender, the company has funded over $73 billion, helping borrowers pay off more than $34 billion in debt.
- Loan amount: $5,000-$100,000
- Est. APR: 8.99%-25.81%
- Min credit score: unspecified
- Best online loans for those with good credit
Upstart uses AI to offer fast-funded personal loans with no prepayment penalties and lower rates than traditional lenders. So far, it has helped more than 2.8 million customers.
Its personal loan terms are three to five years, and 99% of funds are sent just one business day after signing. You can prepay your loan at any time with no fee or penalty.
- Loan amount: $1,000-$50,000
- Est. APR: 6.4%-34.99%
- Min credit score: 300+
- Best online loans for small amounts
What are online loans?
Online or digital or internet loans are unsecured personal loans funded over the internet, eliminating the need for in-person meetings or paperwork.
They can be used for a variety of purposes, such as:
- Personal expenses
- Business expenses
- Student tuition
- To pay off credit cards
- Debt consolidation
Given that online loans are unsecured, your credit score, income, and debt levels significantly influence eligibility. Once approved, you’ll receive a lump sum and repay the loan in monthly installments.
Depending on the lender, interest rates for online loans vary from 6% to 36%, while loan amounts can range from $1,000 to $100,000. Online loans may have fixed or variable interest rates.
Fixed-rate loans have a predetermined interest rate that stays constant throughout the loan term. A variable rate fluctuates with market conditions.
Advantages and disadvantages of online loans
Although online loans are a useful financial tool, they are not the right choice for everyone, so you’ll want to know the pros and cons.
How to get the best online loan terms
Though many online lenders and apps offer similar terms and conditions, you'll want to consider the following before choosing a provider:
Check interest rates
Depending on the lender and your credit score, personal loan interest rates range from 5% to 36%. Reputable lenders typically cap their interest rates at 35% to ensure fair and responsible lending practices.
Although bad actors may tempt you with low advertised interest rates, be aware that the most favorable rates are typically reserved for borrowers with exceptional credit scores, generally above 720.
Add up additional fees and charges
Don't base your decision solely on the lowest interest rate. Be sure to compare all the fees associated with different loan providers, including processing charges, bounce charges, and origination fees.
Some lenders charge high fees, which can increase the total cost of the loan beyond what you expected. For example, origination fees (the set-up cost of the loan) are between 0.5% to 1% of the loan amount.
Comb through the fine print
Lenders often charge prepayment penalties, meaning you would pay more to pay off your loan early than a comparable loan without a prepayment fee.
Additionally, certain variable-rate lenders may adjust rates more often than others, increasing the risk of rising rates more frequently during repayment.
The difference between online loans and payday loans
Both online loans and online payday loans provide quick access to cash, but there are several differences between them:
- Loan amounts: Online loans offer between $1,000 and $50,000, while payday loans are usually around $500 because they're designed to carry cash-strapped customers over until their next payday.
- Repayment terms: Online loans are repaid over several years in installments; payday loans are repaid in full on the borrower's next payday or when they receive income from their pension or social security payment.
- Eligibility requirements: Payday loans target individuals with low incomes and poor credit scores, whereas online loans are generally only offered to those with a good credit score.
- Interest rates: The highest interest rate for online loans is roughly 36%, although most are lower. Sometimes, interest rates on the best payday loans can be as high as 400%.
Step by Step: How to apply for an online loan
Online loan applications are generally similar. Most lenders also offer apps that allow you to manage your finances on your mobile device.
- Complete an online application: You'll need to provide basic information about yourself, your income, and your debt.
- Provide documentation: The lender will likely ask you for further documentation to verify your identity and income, including a copy of your driver's license, pay stubs, and bank statements.
- Wait for approval: Once approved, the lender will provide the loan terms, including the interest rate, repayment terms, and fees.
- Sign the loan documents: You'll need to sign the loan documents if you agree to the loan terms (This can be done electronically.) Be sure to read them carefully!
- Receive your loan funds: Once you've signed the loan documents, you'll receive the funds in your bank account within a day or two.
Final thoughts on online loans
Taking out a personal online loan is a significant financial decision. It involves making monthly payments over a long period, and a single missed payment can damage your credit score.
So it's important to consider several factors before applying for a personal loan, such as your credit score, income, existing debt, and debt to income ration because these will impact your interest rate.
Unless it’s an emergency, it's also worth weighing whether saving up for an expense is better than taking out a personal loan. If you’re unsure, it's always a good idea to talk to a financial advisor.