What comes to your mind when you need to borrow money in an emergency? If you’re like most people, you probably worry about how much you can borrow and how much it will cost. The name of the lender may not even register at first. Why does the type of lender even matter if you can lock into a loan that works for your emergency?
As you’ll find out today, it can matter quite a lot if you choose an online direct lender. These digital lending companies impact how you can apply for funds, the type of loans you may qualify for, and how you can pay them back.
Want to learn more? Here’s everything you need to know about online direct lenders.
What Are Online Direct Lenders?
Sometimes, the best way to define something is by explaining what they are not. Online direct lenders are not loan matching services, brokers, or credit access businesses.
What does this list of organizations have in common? These companies are third parties that never fund loans. Instead, they focus on collecting your information before passing it onto a financial institution that underwrites (or finances) your loan.
A loan matching service, for example, gets you to fill out an application that outlines your financing needs. They take this info and shop it around to its network of lenders, acting as a broker when you choose to apply with one.
All of this changes when it comes to online direct lenders.
A direct lender cuts out the middleman, which is how it earned its name. A direct lender works with its borrowers directly without any assistance from another financial institution at any step of the process.
From reviewing your application and checking your credit to releasing the funds and facilitating your repayment — a direct lender takes all these steps.
What Kinds of Loans Do Online Direct Lenders Offer?
First and foremost, they offer loans online. While some might have brick-and-mortar branches, the vast majority only have digital storefronts. That’s because they don’t need an in-person location to facilitate loans.
All they need is a secure website to host an online application, and they’ll use your bank routing number to deposit funds and collect payments.
This process describes a lot of different loans, which means online direct lenders provide a broad range of financial products. Here are some of them below.
Payday Cash Advances
A payday cash advance is a short-term, small-dollar loan that helps people with bad credit who need help covering minor unexpected expenses. Usually under $1,000, they’re just large enough for an urgent auto repair or an unanticipated medical expense.
A cash advance typically spots you until your next payday, when you’ll have more cash to pay off your loan. As a result, their terms are usually tied to your payday, and on average, you have just two weeks to repay what you owe in a single payment.
With two-week terms, payday cash advances have some of the fastest turnarounds in the lending industry. This timeline can be challenging to match, mainly because these emergency loans for bad credit come with some of the highest interest rates in the business.
Some payday cash advances have triple-digit APRs as high as 600%, which means you might pay more than $20 in fees for every $100 you borrow.
Installment Loans
An installment loan is any fixed financial product that you pay off over a series of payments spread out over time. Just how long you have to repay what you owe is usually tied to the type and size of your installment loan.
A mortgage is one of the biggest, longest installment loans you can borrow. Some people take 30 years of monthly installments to pay off their mortgage.
A personal installment loan, on the other hand, may only give you $2,000, so you might have a term that lasts a few months.
Rates and fees (which affect how affordable these options may be) vary just like term length depending on the type of installment loan as well as your credit score. While excellent credit unlocks the lowest fees, installment loans for bad credit may come with rates that rival payday cash advances.
Lines of Credit
A line of credit is a revolving financial product, which means there isn’t a fixed date when you pay off what you owe and close the account. Instead, you’ll have access to funds on an ongoing basis as long as you keep your account in good standing.
An online line of credit works like the average credit card. You’ll receive a credit limit that you can withdraw funds against. Every month, you’ll receive a bill that you can pay in full, or you can make a minimum payment.
If you pay your line of credit down to zero, you’ll be able to withdraw funds up to your limit again for any unexpected purchase or repair.
How to Find a Legitimate Online Direct Lender
Going online for financial help is both a blessing and a curse. You’ll gain an advantage in how easy and convenient it is to research your options, collect funds, and make payments electronically.
But one of the downsides is how oversaturated the market can be. One quick Google search will generate millions of results, and only a tiny fraction of them will be worthy of your time.
Here are some tips to help you narrow down your options.
Comparison Shop Rates: Don’t be afraid to compare more than five lenders at once. Understanding the options available for your credit score can help you make better decisions.
Look for a License: Although an online lender operates over the web, their legitimacy as a financial institution is tied to a location. They need to obtain a license from the regulatory body of the state or province where they operate. These accreditations ensure online direct lenders follow the local lending and privacy laws of your government.
Read the Privacy Policy: Borrowing money online introduces the issues of fraud. With data breaches happening more often than ever — in the US, cybercrime jumped by 55% in the past two years — you need to confirm a financial institution takes all the appropriate precautions to safeguard your personal information from attacks.
Check Reviews: The Internet can be a great sounding board. You can find reviews left by previous borrowers to get an insider look at how a lender operates. Look for a lender that earns at least a 4-star rating from thousands of reviews — these kinds of stats help substantiate the grade.
The Takeaway: Origination Matters
When it comes time to borrow money, the type of lender you choose can drastically change the way you receive and repay your loans.
Online direct lenders provide a convenient, digital experience that involves communicating with one financial institution. This might come in handy if you don’t want to vet multiple companies, or you fear a loan matching service doesn’t have your security in mind when it handles your data.
That said, every online direct lender offers different financial products with varying rates, terms, and conditions. Take the time to review these options to ensure you and a direct lender will make a good team.
