Are Loans Online a Credit Disaster Waiting to Happen?

Getting loans online can help lower your interest payments but make sure to avoid these traps

Getting loans online has gotten a bad reputation, mostly from payday lenders and a few bad credit websites that have taken advantage of borrowers. Online credit can be a good financial tool though if you know how to use it and how to avoid the traps.

Like any credit, online loans can help you pay for necessities and put yourself back on the path to meeting your financial goals. They can help you lower your interest rate, save you from missing credit card payments and improve your credit score.

Unfortunately, a few websites have used loans online to prey on borrowers. The lenders rely on the fact that bad credit borrowers have fewer options and probably won’t read all the loan details to sneak in all kinds of scams and high interest rates.

Using loans online means seeing through the bad reputation and understanding how to use them as a financial tool.

Are Loans Online for When You’ve Got No Other Option?

Online loans are really the last resort when you need money, right? I mean, who knows if these things are legit or not?

The reality is that loans online are no different than those you would get from your local community bank. All online lenders originate their loans through a bank or from peer investors. Really the only difference is, compared to lending from your local bank, you might actually be able to get a loan online.

When deciding on an online lender, always look for two things to make sure the website is legitimate.

• Make sure loans online are made through a bank that is a member of the FDIC
• Make sure the company is in the Nationwide Multi-State Licensing System

Both of these will probably be in the very small print at the very bottom of the website.

So why the bad rap for online lenders? It’s mostly because payday loans have been online for longer than the better option in personal loans. Payday loans are the loan sharks of lending and have given all loans a bad name. The Pew Charitable Trust found that the average payday borrower takes out eight loans a year for $375 and spends $520 in interest, that’s over 100% interest!

I’ll admit that loans online can get expensive, especially for bad credit borrowers whose rates can go to 30% and higher, but that’s still a lot lower than the payday alternative.

In fact, Lending Club borrowers report lowering their interest rate by more than 30% by consolidating debt from high-interest credit cards.

How to use Online Loans and Come Out Ahead

Like any credit, using online loans without falling into a debt trap is all about how you use it. I didn’t need online loans to destroy my own credit in my 20s. I did it with a traditional mortgage loan and credit cards. It was personal loans from online lenders that helped me rebuild my credit.

• First, put all your debt together from highest rate to lowest. Look through your bills and make sure you can cover your monthly payments.
• Check your rate for a personal loan online. This first soft check won’t affect your credit score and you’ll have an idea of how much your loan will cost. Click here to check your rate now.
• Consolidate all your debt with a higher interest rate than your personal loan. Most sites will allow you to borrow up to $35,000 for three- to five-years but only borrow as much as you need.
• Closing credit cards after paying them off can lower your credit score but do it if that’s what you need to control your spending. Paying off your credit cards with an online loan just to max them out again is the quickest way to a debt disaster.
• Most online lenders will require payments come automatically from your checking account each month. Make sure you have money in the bank! Online loans are just like any other debt and can hurt your credit score if you miss a payment.
• Three-year loans are available at a lower rate but consider taking out a five-year loan. The payments will be lower and your credit score will start improving quickly. Refinancing the loan after a couple of years can really lower your rate.

Don’t buy into the hype that loans online are only for people that have no other choice. Online loans are just like any other debt, for better or worse. Learn how to use these financial tools and you’ll be on your way to lower rates, a higher credit score and meeting your financial goals.