Online loans

Are online loans safe?

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A little research can lead you to the online lender that is perfect for you.

The first bank in the United States opened in Philadelphia in 1791. Until recently, getting a loan worked one way: you visited a physical bank, spoke with a loan officer, filled out an application and wait for a response.

Today, you have other options, including online lenders with lower overhead and potentially lower interest rates. But are online lenders safe? Here, we’ll cover how you can tell if you’re dealing with a reputable lender and how to spot a bad player from a mile away.

Why consider an online lender?

Most online lenders focus on a particular type of loan, such as personal loans. They are also more likely to consider an applicant that a traditional lender might reject. Since online lenders have lower overhead, highly qualified borrowers have access to benefits such as 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 are willing to accept.

Since much of the online loan process is automated, it’s a great way to get through the application process and receive funds quickly.

Finally, while traditional financial institutions may have a narrow view of the customers they want to work with, there is online lending 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. Indeed, legitimate lenders must adhere to the same strict lending rules as physical 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 the bad guys are pretty easy to spot.

How to verify a lender

If you come across a lender online you’ve never heard of (or want to dig deeper into a name you recognize), these five steps can help you get an idea of ​​a lender’s reliability:

1. Check Federal Registration

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 usually find a page that lists the business registration numbers. If not, find out from the lender which states they are registered in and ask for their registration number.

2. Call your state attorney general’s office

A state attorney general’s job is to protect your interests. Call them to make sure the lender you are considering is registered with the appropriate agencies. All you need is the name of the lender.

3. Find their rating with the Better Business Bureau (BBB)

Admittedly, most of what you read about a company 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 information.

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 about their experience, including who they have worked with and if they would borrow again.

It’s hard for a bad player to keep personal loan scams out of the news. A simple Google News search should reveal any issues the company in question is having.

How to spot a skunk

Certain behaviors should automatically trigger red flags. For example:

  • A lender pressures 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 (via email, text or phone) to ask if you want to borrow money.
  • They keep contacting you, even after you tell them no.
  • Your state’s attorney general’s office has no record of them.

The bottom line

Although there are bad apples, the majority of online personal loans are safe and reliable. As long as you strive to identify red flags and do your homework to verify a lender, you are 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 with money.

The Ascent’s Best Personal Loans for 2022

The Ascent team has scoured the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need extra money to make a big purchase, these top picks can help you reach your financial goals. Click here for the full rundown of The Ascent’s top picks.