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Online Lending 101

Before the Internet was created, most people were getting loans from traditional financial institutions such as banks and credit unions. They were applying for loans to cover expenses they did not budget for such as medical emergencies. Today, when people apply for loans online, computer algorithms can quickly determine if their applications will be approved. Many are choosing to apply for online loans, preferring the convenience and fast approval that many online lenders can provide.


What is Online Lending?

Loan companies that offer their services online are referred to as online lenders. Some online lenders also serve customers through physical locations known as storefronts. An advantage of using online lenders is that borrowers can apply for loans on websites at their convenience regardless of their hours of operation. Online lenders also make the application process simple and approve loans faster than most traditional financial institutions.

Many online lenders will set their borrowers up on a payment schedule that usually matches with their paydays. Depending on the type of loan, repayment may consist of  a single payment or multiple payments.


How do Online Lenders provide credit?

To approve loan applications, lenders generally will take into account how likely the potential borrower is to pay the money back by checking the amount and frequency of their income. Some lenders will perform a hard credit check while others may opt for a soft check. Hard credit checks will be visible to others on your credit report while soft checks will only be visible to you.

To comply with state and federal laws, a lender will require borrowers to be old enough to sign a contract, which in most states means you must be at least 18 years old. The borrower will also have to be a U.S. citizen or permanent resident and be living in the state where they are applying for the loan. To receive funds, online lenders will often require an active bank account, a valid phone number and an email address.

Advantages — Why is Online Lending preferred?

According to a study by the American Bankers Association (ABA),  online lending grew by 93% in 2015 and 58% in 2016. By 2020, the industry’s revenue is expected to reach $122 billion - a ten-fold increase in six years. This success can be attributed to the fast loan approvals and easy-to-use lending platforms.


Fast loan approval

Online lenders are often able to keep the approval timeframes short – anywhere from a few hours to a few days, depending on the type of loan a customer applies for. The application review as well as the funding process are all online.


Convenient & simple process

Since the online lending process is web-based, a borrower does not need to physically visit the lender to apply for a loan product. This saves significant time and money that may otherwise be spent on commuting to a lender that provides storefront services only.


No collateral

Though there are some online lenders that offer secured loans, such as title loans, most loans they offer are unsecured, personal loans that require no collateral.


After-hours customer support

Online lenders typically offer customer support past normal business hours to clarify questions and assist the borrower with any questions regarding the application process. Some lenders may even offer round-the-clock support.



Your transactions, payment amounts and dates are often available through an online interface. Such information is updated from time to time, which helps to keep the loan process transparent.


Different Types of Online Loans

Based on your needs, online lenders may be able to offer credit in various forms. Here’s an overview of a few common types of loans:


Installment Loans

Installment loans are also referred to as personal or consumer loans. They can be unsecured or secured loans, paid back in installments over a fixed period of time.


Payday Loans

A payday loan is a short-term, small-dollar loan that is paid in full on your next payday. The maximum amount you can borrow for a payday loan is different in each state and varies depending on the lender. An online payday loan should typically include all the benefits of a traditional storefront payday loan while also providing the comfort of transacting online.


Line of Credit

An online line of credit will include all the benefits of a traditional unsecured loan but will allow you to have more control over your cash flow. When you need money, you can borrow any amount up to your available credit limit without having to apply for a new loan. If you withdraw all your available credit, you can’t borrow more until you pay down the principal balance of your line of credit. The amount of principal you repay becomes the amount of available credit you can then draw down from.


How to manage finances to repay your loan?

When you are borrowing money from an online lender, you need to also plan for repayment. Since online loans tend to be short-term and have to be repaid within a specified time, you’ll have to be prepared for the financial commitment. Make sure you can pay your loan on time or make early payments whenever possible. If you miss a payment, you may incur late penalty fees.


  • Set aside a portion of your earnings every month, even before you begin paying your bills for repayment before you start spending on other personal needs.
  • Plan ahead for the upcoming expenses and limit your spend for that month, it’s important to account for essential expenses like rent, utilities, phone, food and so on.
  • Imagining that you’re paid a lower salary might help motivate you to save money. If your salary is $500, then you could imagine that you’re paid only $400 to help you curb your spending so you’re able to meet your repayment obligations on payback day.
  • To ensure you have enough money to make your payments, add a reminder to your calendar to check your bank account at least a day before your payday.


To understand and learn more about how to choose an online lender, explore our resource section. We have detailed guides that can help you choose the most appropriate loan for your needs.

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