What to Know When Applying for Online Loans

When looking for online loan options, Canadians should consider more than how much they might be approved for and how to spend it. Personal loan requirements [1] in Canada often vary by lender, whether online or a bank or a credit union. Typically a lender will require proof of a regular income, government issued ID, an active bank account and a permanent address. 

In situations where you might be applying for online loans with bad credit the interest rate or APR might be higher as those with a poor credit history are considered more of a risk by lenders. The following provides insight for things to consider when comparing online loan options and how you can avoid mistakes when borrowing.

Know the Score about your Credit Score and History

When looking to apply for a loan, either online or at a bank, one thing most lenders will be interested in is your credit score. If you don’t know what it currently is, that’s a good place to start. You can get a free copy of your score from Transunion [2] and Equifax [3]. 

If your credit score is 699 or less, you may find there are borrowing options like a bank less likely to be available, and the interest rates might not be what you hoped. Since your credit score gives lenders an idea of what kind of risk you might be as a borrower, your ‘creditworthiness’ is an indicator about whether a lender will probably consider before your application might be approved. But the good news is there are many online lenders that will consider your application even if your score is below 700 that also offer reasonable rates.

Make a Go with What You Owe (and Earn)

If you have outstanding debt, this too can influence lender decisions when trying to get approved for online loans. When you have a higher debt-to-income ratio (that’s how much of your income goes towards paying your debt) then lenders will presume you might have trouble making payments. Keep in mind that it’s not how much you earn each month and that other factors like your spouse’s income or freelancing work can be considered. 

If your monthly income is $5,000 but you pay $1,500 to rent or mortgage, about $1,000 to bills and expenses, and $2,000 towards debt, you might not look like a good prospect to lenders. 

Your debt-to-income (DTI) ratio is high and any sort of upset to your budget could impact your ability to make your loan payments. Your debt to income ratio is another factor that lenders will look at. While it isn’t tied to your credit score per se, it is relevant to your creditworthiness. Your DTI ratio is calculated by looking at what your income is, and comparing it to how much of the available credit you have used. A good debt to income ratio for most lenders is under 30%, and you might qualify for even better rates if it is under 10%.

Do You Need Money Now?

That’s right, you should not only ask yourself whether getting a loan is right for you, but also whether now is the right time to apply. After all, it becomes a financial commitment and the reasons you might apply can seem like a good idea at the moment but it’s important to be honest about whether you need it, or whether you can afford it. 

If you were thinking of borrowing for debt consolidation, that usually makes sense, as you might lower your monthly payments along with even paying less interest if you qualify for good rates. Or perhaps you were thinking of getting a loan because you wanted to do some home renovations. This can make sense since the investment is in your home and can add additional value as well. 

Doom spending has become a thing lately, with the economy the way it is many are taking on more credit. Living in the moment only means you’ll pay the price later, and that can wreak havoc on your personal finances. So if your purpose of getting a loan is for a luxury vacation or other reasons that might not be essential, it’s always wise to think twice about whether it’s the right choice. If you’re doom spending to cope with financial anxiety or similar, it’s more likely this will only make things a bigger problem and not a cure.

Maybe you have home or car repairs, and need to take care of matters as it isn’t really an option. This would also make sense, as would other unexpected expenses that you don’t have the funds or savings to cover like medical bills, a funeral, or other emergencies.

But if you were taking out a loan because you would like to use it for holidays or to buy something you want but don’t necessarily need, this might not be a great idea and you should give it some real thought before signing. In this case, you might try saving up money for whatever it is, or even half, as the cost of borrowing doesn’t come cheap.

RELATED: 10 Bad Reasons to get a Personal Loan

What Can You Afford?

One of the more important questions to ask yourself when considering to take out a loan is just how much you can afford. The monthly payments are a true measure of what amount you might borrow, or at least afford. So depending on your credit score, fees, interest rates and APRs, it’s the monthly payment that is one of the best indicators of what you are able to afford. 

In many ways it’s what you can afford per month that is one of the more important factors when looking into and comparing loans online. While you might assume you need ten thousand dollars for something, if the payments were beyond what you can afford, would you suddenly realize that you could do with half? This is something to be honest about with yourself.

How to Compare Loans Online?

The following are factors or things to consider when comparing online loans:

Loan Amount – the amount you borrow can affect whether you might be approved

Interest Rate – this is the cost of borrowing, and can run from a few points to 40 plus percent

Loan Term – how long the loan duration is can impact both the payments and cost of the loan

Other Fees – from origination to pre-penalty fees, you should read the terms before you sign

As your credit score has considerable influence over the rates and terms a lender might offer, you should know what it actually is before you start comparing online loans. 

What you Owe and the Repayment Duration

If you meet the criteria, have a good credit score and are confident of being approved, you should start looking at what you can afford for monthly payments. You should also examine the difference with different terms or length of time for repayment to see how this might fit with your budget and what you can afford to borrow.

Suppose you were borrowing $10,000 and had two options to choose from.

Option A is willing to provide at 5% over 5 years, making the monthly payment about $190.

Option B is willing to provide at 6% over 3 years, making the monthly payment about $305. 

At first you might assume the first option is the best one because it has a lower monthly payment, but if you calculate the payments over the different durations ( 3yrs vs 5 yrs) you will find that the larger payments over a shorter term means you pay less in interest overall. The savings would amount to almost $380, so if the monthly payments were manageable, then the second option of 6% over 3 years might make more sense and save you some money.

How’s Your Credit?

When you apply for a small loan, some lenders will run a credit check. But in a few cases this also depends on the type of loan that you’re applying for. If you were applying for an installment loan then it’s possible the lender is using an alternative method than running a standard credit check. 

If your credit score is poor, you have the option of considering bad credit loans with higher interest rates, putting the idea of getting a loan on hold until you improve your credit score for better rates, or considering loan alternatives that might be suitable. 

Will A Loan Affect My Credit Score?

Whether applying for a loan might affect your credit score depends on the type of loan. If you are applying for a personal loan then it is likely that a hard credit check would be involved, and this can affect your credit score. But if your loan request is for an installment loan, it’s possible that they do not run a check with credit bureaus and use alternative data. 

The latter is more likely with small dollar loans of around $1,000 or less. But the best way to determine whether the lender might use a credit check for an online loan request is by checking their website or even asking them if it’s part of their process. 

The Details

Most potential lenders will want to know all sorts of details when considering your loan application, and your employer’s contact details is one of them. This is to verify your income along with other things like employment dates. Some might even ask for past employers as well for the sake of getting some references before making a decision. 

Is it Safe to Apply for a Loan Online?

Borrowing from online lenders has proven to mostly be safe in recent years, so if you do your homework (and read the terms before signing) you should be fine. Choosing a reputable lender is not difficult to fill the need. Sometimes online lenders compared to banks can be a better option, especially in cases where a bank would not approve a potential borrower due to having a poor credit history. When you have all your details ready, like employment and contact info, you can prequalify by applying to demonstrate your creditworthiness to lenders

RECOMMENDED READING:

1. What to Know Before You Apply for Personal Loans
2. What Credit Score Do You Need For a Personal Loan
3. Does Your Personal Loan Have A PrePayment Penalty?
4. How a Personal Loan Can Help Pay Off Your Debt Faster
5. How to Get Approved for a Personal Loan with Really Bad Credit

REFERENCES:

[1] https://www.canada.ca/en/financial-consumer-agency/services/loans/personal-loans.html
[2] https://www.transunion.com/annual-credit-report
[3] https://www.consumer.equifax.ca/personal/products/credit-score-report/