Personal online loans are viewed by lenders as higher risk because a personal loan is another way of describing unsecured debt; as in a loan that isn’t backed by collateral such as a home or car. From the borrower’s perspective, a personal online loan carries potential dangers that aren’t typical of traditional bank loans. These heightened risks to borrowers fall into 3 categories: safety, ease-of-access and predatory lending practices.
Are Online Loans Safe?
Many online lending sites are backed by traditional banks who invest heavily into cyber security and other safety protocols in order to protect their customers’ data.
There are newer companies in the online lending space that do not have bank charters or physical locations for customers. These financial technology companies (fintechs) don’t have long histories of business operations and while many are legitimate, all lack the test-of-time element in their reputations.
The best way to minimize the risk of your personal information falling into the wrong hands online is to look for the secured website symbol. You should see a tiny lock icon just before the web address in the url bar of your browser. (This website is secure and should also show the lock.)
Look for this lock and the corresponding https:// secured protocol every time you visit a website and before entering any information.
If you are going to leave money on deposit with a fintech company, find out if or how your money will be insured.
Online Loans Might Be Too Quick & Easy
There’s no such thing as easy money, whether we are making it or borrowing it. Yet, ads like ‘Online loans, Get cash today’ and ‘Online personal loans – No credit check,’ make borrowing online seem like a painless, simple transaction.
Add “Instant Approvals” to the mix and you have a sweet and sour recipe for your finances that you can order up with just a few clicks. The appealing convenience of borrowing money without leaving your home can turn sour when you later become aware of a better solution.
For instance, what if it turns out you didn’t need the loan after all? Maybe someone offers to help you in your time of need. Perhaps your bank has overdraft insurance for which you qualify that could be a better solution than a short loan.
There may be half-a-dozen solutions to your problem that aren’t readily apparent. You’ll only be able to determine whether there are other viable options by taking some time to think things through.
But an expedited loan that is designed to remove critical thought from the process doesn’t afford the online borrower that time. Once funds are deposited, it’s too late for further consideration.
Online “Payday Loans” and Predatory Practices
Online advertisements for payday loans are typically promoted as “Bad credit? No problem” loans. Thirty-day loans under $2,000 are common.
However, interest rates on payday loans average from 300% to 400% and in some cases, well over 400%. Such exorbitant interest rates means a payday borrower will repay at least 3 times the amount borrowed!
Unfortunately, the aftermath of many high-interest loans, whether payday or installment, often leads to defaulting and ultimately filing for personal bankruptcy.
Are payday loans legal?
Payday loans are prohibited in Massachusetts pursuant to 209 CMR 26.01. While some states allow payday loans both online and off, Massachusetts does not.
Be aware that there are illegitimate webpages and lending sites that still market these types of predatory payday loans to Massachusetts residents.
If you are a MA resident who has been given a payday loan, call my office now to schedule time to talk with me. You may have protections and consumer claims against the lender.
Trapped Debt Scenarios
Trapped debt starts when a borrower cannot repay a short term loan or other debt such as credit card balances. The borrower then consolidates those debts into a single new loan, hoping to save some money in the process.
A common drawback to debt consolidation is that without crunching the numbers correctly, borrowers can end up paying more in interest over longer payback periods than the APR might suggest.
More worrisome is a return to old spending habits. After all, the new loan paid off all of the other ones. If a borrower spends up those accounts to prior levels, they’ll have doubled down on the debt. These conditions result in debt traps.
While some unscrupulous online loan companies will gladly help you continue the cycle, you should talk with a qualified consumer finance and bankruptcy lawyer about real solutions to getting out of trapped debt cycles.
Other Pitfalls to Avoid
There has been a rise in online loan matching services. These sites look like direct lenders, but they’re not. They take your information and then pass it along to direct lenders who they think will be interested in giving you a loan.
These matching services collect a fee from a “marketplace” of lenders for sharing your contact information and the loan terms you’re looking for.
Borrower Beware: Many loan match companies fail to verify lender credentials beforehand. Typically, these websites are run by marketing firms that specialize in lead generation. Thus, you may get bombarded with phone calls and emails from high-pressure sales people. Never fall for any ‘time sensitive’ ‘expiring offer’ or other time-urgent tactics.
According to NerdWallet, legitimate online lenders compete alongside scammers in the marketplace, making it difficult for consumers to tell the good from the bad.
When you are looking for a loan, it’s important to know that a reputable online lender will always want to look at your credit score and ability to repay. Furthermore, credible lenders will not charge annual percentage rates much higher than 36% —at most.
Consider carefully the consequences of not paying your debts, and understand that there are options other than debt consolidation should your finances get beyond your control.