What are online loans?

From covering medical bills to paying for home renovations to even purchasing travel, online loans may be available to help individuals split large payments into smaller installments.

Online loans refer to loans that are received from a digital platform or app instead of a traditional bank. People may apply for online loans to quickly access a lump sum of funds and manage their financing from their mobile devices.

Learn about different types of online loans, how to get an online loan, and possible factors to consider before applying.

Different types of online loans

There are several types of online loans. Here are a few common options:

• Personal loans: Generally, personal loans can be used for any reason, such as covering emergency expenses, paying for a home repair project, or consolidating credit card debt. Personal loans are often received as a lump sum and paid back in installments over a set period of time — from months to years, depending on the loan terms. Personal loans may also come with fixed interest rates, which remain the same for the lifetime of the loan, or variable interest rates, which can fluctuate over time.
• Buy now, pay later loans: Individuals can use buy now, pay later loans to buy a product or service at checkout — like a couch or a last-minute flight — and break up their payments over weeks or months. Many retailers now offer buy now, pay later options at checkout, and there are different buy now, pay later apps to choose from. These loans may also come with low or no interest rates depending on the provider, terms, and purchase amount.
• Lines of credit:  Lines of credit can be used to access funds as needed up to a certain credit limit. Instead of receiving a lump sum of money upfront, people can apply for a line of credit and only pay interest on what they borrow. However, lines of credit may come with increased interest rates. For example, a credit card is a payment card that accesses a line of credit.

Potential risks and considerations for online loans

Borrowers should be aware of certain possible risks and terms when applying for a loan online. Examples include:

• Fees: Online loans may include fees, including application fees, annual fees, prepayment fees, and late payment fees.
• Interest rates: Watch out for high interest rates or variable interest rates, which can fluctuate over time. Some lenders may offer low or 0% introductory rates for a certain period, after which higher interest rates kick in.
• Credit score impact: Loan applications may trigger a hard credit inquiry, which can temporarily lower a borrower's credit score. Making late loan payments or missing payments can also negatively impact someone's credit score.
• Repayment periods: Online lenders will normally set a repayment period for each loan, which can range from months to years. Borrowers should be sure they can fully pay back their loan — plus interest — in this period of time.

How to get an online loan

The steps to get an online will vary depending on the type of loan being applied for, the loan provider, the loan amount, and other factors. Consider these steps before applying for a loan:

• Research reputable and trustworthy online lenders: For extra precaution, look for companies with physical addresses on their website, authentic customer reviews, and press from verified sources.
• Pre-qualify: Choose a few lenders and enter basic application information to pre-qualify (if available).
• Review loan rates and terms: Compare loan terms and select the lender that offers repayment periods and interest rates that align with the applicant’s needs.
• Apply online: Go through the full application process. This may involve submitting documents, such as proof of identity and income, and other information like what the funds will be used for.
• Receive approval and funds: Once approved, borrowers will have to sign a loan agreement. Once the agreement has been signed, the funds will begin processing. Depending on the lender, they may receive funds on the same day or within a few business days.