Finding the Best Online Loans: 5 Questions to Ask

Once upon a time, getting a cash loan meant physically going to a bank, payday lender, or pawn shop. Today, there are dozens of online lenders vying for your business. Not only is it much easier and faster to get a loan online, more options and competition in the marketplace mean you can afford to be picky when comparing the best online loans for your situation.

It also means you might be left with a lot of loan questions. Before you apply ask yourself (and any potential online lenders) these five key questions to find the best online lender:

What Questions Should I Ask Before Taking Out a Personal Loan?

Before you start applying for loans online, figure out how much you need to borrow, be realistic about how long you want to make loan payments, and check your creditworthiness. Once you're ready to apply, compare interest rates, loan terms, and customer benefits across several lenders to make sure you're getting the best deal.

1. How Much Do I Need to Borrow?

There are two main types of online loans: installment loans and payday loans. Payday loans typically max out at $1,000, and even less in some states. Installment loans, or personal loans, may allow you to borrow up to several thousand dollars. Before you apply for a loan, make sure the loan amount will be enough to cover your needs. While you don't want to apply for more than you can afford to repay, if you ask for less than you need to cover your expense, you may have to take out a second loan.

2. How Much Time Do I Need to Repay the Loan?

Payday loans and installment loans also differ in loan terms when it comes to repayment. With a payday loan, you usually only have a few weeks (until your next payday) to pay back the loan. Installment loans allow you to pay the loan amount back in monthly or biweekly installments over a period of several months to several years.

Keep in mind, some lenders may charge you an early pay-off fee, meaning if you pay off your loan early, you may end up paying more. Be sure to read all of the disclaimers before you apply for the loan.

3. Can I Get a Loan Even With Bad Credit?

Can you get a loan with a poor or limited credit history? It depends. Some payday lenders will give you a loan without a credit check—they just need to see proof of income so they know you can pay them back quickly.

Installment loan lenders will likely check your credit score, but that doesn’t mean you’ll be disqualified on the spot. Every lender sets their own eligibility limits to what credit scores and income levels they’ll approve.

Either way, be ready to provide pay stubs or other financial statements like checking and savings account statements to prove you can handle the payments. Most lenders will want to verify your debt-to-income ratio, or the percentage of your income that goes toward debt repayment each month, to confirm you have the cash flow to repay the loan.

4. What’s the Best Interest Rate I Can Get?

Payday loans and other loans for borrowers with bad credit tend to have higher-than-average interest rates, but it’s worth shopping around for the best deal. Also, note that payday loans have higher APRs (annual percentage rates) than online installment loans. Be sure to do the math on your loan options before you borrow. Even shaving off a few interest points can save you a lot of money over the course of your loan. Comparison shop with multiple lenders to see if you can get a lower interest rate.

Also don't forget to factor in the total cost of a new loan. Some lenders offer fixed-rates, meaning your interest rate stays the same over the life of the loan. While others offer variable rates, which can increase over time. Also, be on the lookout for origination fees. Origination fees are usually a percentage of the total loan amount and are taken out of your amount borrowed, increasing the overall cost of the loan.

5. Can I Actually Build Credit?

Some online lenders simply loan you money and that’s it. But others want to help you get your financial life on track. Look for a lender who offers benefits to their customers like credit score monitoring and financial education resources. Those tools can help you build good credit over time.

Also, make sure the monthly payment on your installment loan will be reported to the credit bureaus. A history of timely payments over the life of the loan will have a big impact on your credit score.

While you’ve got lots of options when it comes to online loans, research any potential lenders before you fill out a loan application so you know you’re getting the best deal and helping to build good credit over time.