What Is The Difference Between Direct Online Lenders And Banks?

Taking out a loan affects any person’s life in one big way, regardless of the financial need. That being said, borrowers should carefully consider all the different options that are available to them. It’s easy for consumers to get unfair terms with the increasing number of lenders offering different types of loans nowadays. As a result of the failure to compare loan institutions when shopping for a loan, you could end up taking out something that you can’t afford.

Generally, people looking to borrow cash for different purposes either work with banks or direct online lenders. When it comes to getting a loan, here’s what borrowers need to understand about the differences between direct online loan companies and banks:

1. Qualifications

If you're looking forward to applying for a loan from any bank in the US or other parts of the world, then, it's important that you have a good credit score. A credit score is typically used by banks, consumer credit card companies, and other financial institutions, including online lenders, to determine the risk a potential client poses to a loan or other credit transactions.

Your credit report will help the bank to determine your ability to repay, and your overall reliability as a borrower. That said, it’s always better to maintain a good credit score than to risk being refused a loan because of your bad credit history. A good to excellent credit score is what’s required to qualify for a bank loan, which means you got to have a FICO score of at least 700. Note that if you’re a business entity, then, you also have to be in operation for not less than two years in order to qualify.

On the other hand, a direct online lender doesn't require a high credit score. For a borrower to qualify for a loan, but they'll still take a close look at your financial circumstances. Be sure that you provide enough information to increase your chances of getting approved. The more information that you provide, the better, so that you can answer any questions the lender may have in the quickest time possible.

It’s essential to note that there are also some online lenders that require no credit score minimum. You have to be very careful when dealing with no-credit lenders, however, as it’s how most scammers try to present themselves to lure new victims. However, that doesn’t mean there aren’t legit no-credit check direct online loan companies out there.

2. Paperwork

You've probably heard of the requirements needed to get a loan approved when you're applying for any type of loan in most lenders. In many instances, the paperwork required to apply for a loan is extremely similar to that of applying for a credit card. There are three main forms that you'll need to fill out. They include your income tax return, bank statements, and credit card statements, if applicable.

When you apply for a loan with a bank, you’ll be required to prepare and submit significantly more paperwork than when applying with direct online lenders. While it’s true that you may still have to submit similar paperwork to some online lenders, the majority of direct online loan companies require less documentation.

The amount of documentation you'll need when applying for a loan online is very minimal. In fact, many online lenders won’t require any form of documentation at all. Most of them will only require you to link other financial accounts or online banking during the application process. However, it's still good to have a copy of your federal income tax return because there are still direct online loan companies that would want to see proof of your past financial history with the Internal Revenue Service.

Bank statements may also be requested so that the lender can view your records and determine if you're in good financial standing. It’s also a good idea to prepare your credit card statements just in case the online lender will ask for them.

3. APRs

So, what's an APR in a loan? To explain this simply, your loan interest rate will be determined by the APR. When applying for a loan, you'll be required to pay this rate on top of your regular loan payment. You should compare several different lenders to find out the best deal for you and the lowest rate of interest. You can save hundreds of dollars per month with a good APR in a loan, and if you have good credit, your APR will likely be far less than that of a borrower having a poor credit score.

The higher APRs of direct online lenders are one of their biggest downfalls. Some APRs can actually be well over 80%. The APRs in bank loans can be in contrast with those of most online lenders. That’s because banks are able to provide even single digit interest rates to qualified borrowers. However, if you shop for a loan provider carefully and extensively, it’s not impossible to find a direct online loan company that also offers APRs that are kept at single digit.

4. The Time Involved

There are many reasons why you may want to look into speed of funding when taking out a loan. One such reason is that you may not have the time to go and apply for any type of loan on your own. Also, you may not be able to make it to a physical bank, or you may be in a position where you don’t wish to have to deal with physical applications at all.

The good news is that it will only take a few hours for you to apply for a direct online loan and receive feedback. Taking out a student loan, auto loan, or any other type of loan with a bank, however, can be one grueling process. The application and approval process when taking out a loan with a bank may involve making phone calls, submitting documents, and visiting the bank’s branch before receiving funds.

If you’re taking out a loan with a traditional bank, it can take several weeks to months for you to receive a notification from them. The releasing of funds may also take additional time. If you need cash for emergency reasons or to cover other important expenses, the waiting time can be frustrating. In contrast, direct online lenders can make a decision and let you know about it in as fast as the same day you applied for the loan. Some online loan companies even offer same-day deposit of funds to the borrower’s account.

5. Cost And Fees

Applying for a loan will be inexpensive with most online lenders, but, as already mentioned, expect higher interest rates. Banks, on the other hand, tend to ask for lower costs and fees upfront, but they don’t guarantee approval.

Qualities One Should Look For In A Lender

Regardless if you’re opting for a bank or a direct online lender for your next loan, it’s important to work with a reliable lender. Identifying the best lender for your needs will require that you have an idea of what characteristics to look for in them.

• Solid Reputation – Borrowers are keener than ever on working with reputable, trustworthy loan companies, with the spike in the number of lenders nowadays. What you can do to establish a lender’s credibility is to read reviews on social media platforms about the lender so that you’ll learn about how they handled customers in the past.

• Flexible - To ensure that banks comply with set guidelines, they’re subjected to regular audits. They also follow guidelines that govern their way of issuing loans. However, borrowers tend to look for lenders who are actually taking into account their capability, while still following the rules. That’s to ensure that borrowers can pay the loan back comfortably without being overwhelmed.

• Sufficient Lending Amount – People take out a loan to sort their financial needs out. That being said, there’s no point in working with a lender, may it be a bank or a direct online loan company, that can’t advance the loan amount you require. Therefore, it’s best to choose a lender that’s stable and one that’s not only able, but is also willing to lend you higher amounts of money.

• Responsive – Financial lenders, both banks and online lenders, use terms that can sometimes be confusing and intimidating. That’s why it’s important for a lender to take time to explain to borrowers the details of the loan, helping them make the right choice. Simply saying, a good lender is one that’s responsive to your needs and concerns.

Bottom Line

Direct online lenders are a good option or alternative for individuals who are unable to qualify for a bank loan. If you’re opting for a direct online lender, keep in mind that the online lending industry is under less regulation. That means that the chances of falling into the hands of predatory lending practitioners is higher. But, again, there will always be an online lender out there with solid reputation if you just search for one carefully.

Banks, on other hand, are typically a safer option. They can also provide the funds you applied for at lower rates (typically). However, in order to qualify, you’ll need stronger credentials, and you have to be prepared to wait much longer. Before making a decision about where you’ll borrow any type of loan, comparing your options is crucial.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes