Applying for an online personal loan: What to consider

From buying a car to paying for a wedding, consolidating debt or making some home improvements, there are a whole host of reasons why you might be considering applying for a personal loan online.

If you’ve decided that a personal loan might be right for you, it’s usually fairly straightforward to apply online. But before you apply, it’s essential to make sure you’ve done your research.

As with all types of loans, approval for personal loans can depend on a variety of factors including your credit score, your income and debt-to-income ratio to name a few. They aren’t always the right option for everyone. Here are just a few things to consider before you apply.

An online personal loan is any type of personal loan where you apply online to a lender to receive a fixed amount of money in a lump sum. These are often unsecured loans, which means you won’t need to put up an asset as collateral. These loans can be used for almost anything, however depending on the lender and the loan specifics, you may find that some do have restrictions on how they can be used.

Your repayment terms can range from a short term up to a number of years and interest rates on personal loans can be fixed or variable. Fixed meaning the interest rate and repayment amount will be the same throughout the life of the loan.

Applying for a personal loan online is similar to applying in person. You’ll need to supply the appropriate documentation, personal information as well as financial information according to the specific lender’s requirements.

From there, the lender will check your credit history to ensure that you meet their requirements to approve you. The lender will then determine your interest rate, loan terms and approval amount in a loan offer. Once you agree to the loan contract you’ll usually receive the funds pretty quickly in a lump sum and begin paying the loan back in instalments.

Applying online offers you the convenience of completing the application process in the privacy of your home at a time that suits you, rather than in person at a branch. The online process is typically straight forward and the response time on an online loan is usually prompt.

Online personal loans might be an attractive option if you need funds quickly. If approved, you’ll typically receive the funds within a few days.

You might decide to use an online personal loan to help pay off some higher-interest debt. Depending on your circumstances, personal loans can sometimes be an option to consolidate credit card and other debt to hopefully save money. It’s important to make sure the debt consolidation is suitable for your circumstances by checking all the fees and interest rates. If you’re struggling with debt, it’s always a good idea to speak to someone who may be able to help, such as a financial counselling service. This might help you to pay the debt off quicker and may improve your credit rating over time.

However, personal loans are not always the best solution for everyone as they are still another form of debt. If you can’t afford the repayments, have a habit of overspending and don’t genuinely require the money urgently, another option might better suit you. If unsure, use a personal loan calculator or talk to a financial professional to determine whether or not an online personal loan is a suitable option for you.

Personal loans aren’t a one-solution-for-all option, so, depending on the lender, there may be a few types of personal loans to consider for your particular situation including secured, unsecured and debt consolidation loans.

Generally speaking, banks and lenders will offer a variety of the following types of online personal loans.

A secured personal loan allows you to borrow in exchange for putting up an asset as security against the loan. In some cases this may result in being able to borrow at a lower interest rate than an equivalent unsecured loan, making the repayments more affordable.

An unsecured personal loan doesn’t require any collateral. In some cases they may charge higher interest rates or higher fees compared to some secured loan options. Also, if you fail to make payments, the lender can still take action against you for defaulting so they are by no means consequence-free if you don’t make your agreed repayments on time.

On the plus side, unsecured loans can have simpler application processes and you may still find competitive interest rates by comparing a range of personal loans.

A debt consolidation loan is a type of personal loan allowing you to combine your other debts, such as a credit card or a car loan into a single loan, allowing you to pay them off in a single payment, hopefully at a lower interest rate and with less fees. Before you decide on a debt consolidation loan though, it’s important to consider that you could end up lengthening your short-term debt into a longer loan which may cost more over the years.

All personal loans come with either a fixed or variable interest rate. A fixed-rate loan means that the interest rate and repayment amounts will remain the same for the duration of the loan. Alternatively, a variable rate personal loan means your interest rate might change by either increasing or decreasing during the loan term.

Some personal loans may include a break fee for paying the loan off early, however this is generally more common for fixed rate loans. Some variable-rate loans might offer greater flexibility to switch loans and lenders, but will be subject to interest rate fluctuations.

Some of the features of an online personal loan include flexible use of the funds, meaning there are typically no restrictions on how the money is used. Flexible repayment periods can help determine the length of time you’ll be making the repayments.

Online personal loans also offer the convenience of lodging your application online with fairly minimal documentation. Key documents that lenders will generally require include proof of identity and address, proof of age and proof of income.

Additionally, online personal loans, if you’ve been approved, tend to disperse funds fairly quickly.

Personal loans can offer benefits over other types of loans, but they aren’t without cons. Typically, they can be quick and relatively easy to apply for and you’ll receive the money in a lump sum, which may make it easier to make a large purchase or consolidate debt.

If you opt for an unsecured personal loan, no asset is required to secure the loan and, generally speaking, online personal loan approval times are relatively quick. Lastly, you may be able to find online personal loans with a lower interest rate than some credit cards.

Online personal loans are not without drawbacks though and they are not suited for every individual or situation. Some of the cons to consider before taking out a personal loan would be the interest rates. In many cases, the interest rates offered with a personal loan may be higher if you have a poor credit history or other debt.

Personal loans generally come with a range of fees and penalties that can quickly increase the cost of borrowing. Some lenders charge penalty fees if you make additional repayments or pay the balance off before the end of your loan term. Be sure to research the terms and conditions of the loan you're considering to fully understand the fees that might be involved before applying.