If there is one thing that most Americans need right now, its more money. Online loan companies know this — and it’s dangerous for many of us.
Since the financial crisis of 2008, when banks were reluctant to extend credit, American household debt has gone down a bit.
That is because while financial institutions were given bailouts, many Americans lost their homes, their investments, retirement funds, savings, or were forced to move in with friends or relatives.
We were in no shape to borrow.
Now as more financial institutions are beginning to extend loans, Americans are falling even deeper into debt again. Americans, as individuals and households, owed over $13 trillion dollars, collectively, in 2018.
The rise of big debt
A Federal Reserve study conducted last year revealed that more than 35% of Americans could not pay for a financial emergency over $400 if it occurred.
While the banking industry is not innocent, Americans seem to be falling into deeper debt holes of their own making now.
John Thompson, the chief program officer at the Center for Financial Services Innovation, concurs.
“Ten years ago, a lot of the problems economically for households were sort of covered up in debt. … And it sort of feels like that’s starting to happen again,” said Thompson.
While banks have not helped the issue, many Americans are still struggling with saving more money than they spend.
Accordingly, Americans are applying to get money from online loan companies in record numbers, a decision that can cause more problems than it solves.
The online lender in detail
In the aftermath of the 2008 financial crisis, banks and credit unions became more reluctant to offer personal loans or issue credit cards.
Especially personal loans. For anyone who qualifies, the traditional bank loan is a time consuming and legislatively arduous process. For one thing, you have to go to the bank, endure an interview, allow background checks of your credit history, and fill out mountains of paperwork.
Then you have to wait days, weeks, or months for a final decision.
If you don’t have sparkling credit history, or a verifiable history of paying back debts and bills on time, applying for a personal loan at a bank or credit union is a waste of time.
Also, if you don’t have the means to pay back the loan, you’ll put yourself into a deeper debt hole.
Still, just as nature abhors a vacuum, in recent years, the advent of online loan companies has proven popular with people who need cash quickly.
Online lending is also known as peer-to-peer (P2P) lending. A financial institution, or individual, offers loans to anyone through a website as a third-party facilitator.
You would have to register and submit your personal information. After doing so, you can compare the interest rates of companies and individuals willing to extend loans to you online.
Online loan companies are not a fringe business these days. There are numerous online lending companies that command the same attention from consumers as do traditional financial lenders.
Online lending companies include firms such as Avant, Earnest, LendingPoint, LightStream, Marcus, OneMain Financial, SoFi, and UpGrade.
Lending Club is currently the largest online lender in the world. By some estimates, Lending Club, which launched in 2007, facilitated anywhere between $35 billion and $55 billion in online loans in 2018.
The online lending application process
Many people worry about online lending scams. And online loan companies that give you money even though you have no job and bad credit might be scams.
Most legitimate online lenders require you to be gainfully employed, have lived at your place of residence over a year, and have a credit score of at least 680 or more.
Having bad credit won’t entirely preclude you, but you are likely to pay a higher interest rate.
More information, like a W-2 form or social security information may be required, but mostly basic information is needed.
The most important requirement of an online lender application process is having a bank account. If you are approved for an online loan, the online lender will send you the loan details, repayment schedule, and a contract via email.
The loan amount will then be automatically deposited into your bank account.
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You can borrow a $100 or a few thousand dollars. An online lender could loan you tens of thousands of dollars, or more, to start a business if you prove creditworthy.
Unlike a traditional bank or credit union loan, you could be approved within hours or a day. The agreed upon loan amount could be deposited in your bank account within hours or a day.
For many people, the convenience of an online loan means they fail to analyze the details of the online loan itself, and that’s a big risk.
The fine print with online loans
What most people don’t fully appreciate about the convenience of online loans is that they are primarily convenient for the online lender. Because so many Americans are in debt and are seeking cash by any means, many apply without fully considering interest rates.
For one, online lenders are not beholden to the federal laws that banks and credit unions must follow.
The average online lender charges anywhere between 4% and 36% — more than double average credit card rates.
Any online lender who charges more than 36% could be a predatory or scam lender. Yet, there are some online lenders who charge more than 1,000% interest.
They know there are desperate people who can’t get a loan any other way. Online lenders may also charge serious penalty fees for partial, late, or delinquent payments.
You give an online lender the right to deposit and withdraw from your bank account on terms beneficial solely to the online lender.
After the money is deposited, it is automatically withdrawn on a contractually agreed upon repayment schedule. Usually this is your payday schedule.
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You must take care to have funds available for withdrawal. Otherwise, along with mounting penalty fees from the lender, your bank will add overdraft fees to the mix.
If you must borrow online, be choosy
If you do decide to apply for an online loan, be discerning. Compare interest rates. Keep track of your repayment schedule.
Also, treat an online loan as a means to pay off your other debts. Not as a way to get money quick. Otherwise, you could end up in a deeper debt hole than before you started.