Where Do Online Lenders Get Their Money? Your Lending Questions, Answered

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Every year, more than one-third of Americans (that works out to approximately 83.5 million people) take out loans.

Most of these people apply for loans with a traditional bank or credit union. At the same time, though, more people are starting to rely on online lenders instead.

Have you ever considered working with an online lender? Are you wary of how they work and whether or not they’re actually legitimate? 

If you’re on the fence about online lenders, keep reading. All your most pressing questions are answered below!

What Services to Online Lenders Offer?

In most cases, online lenders offer the same services as traditional lenders.

You can work with an online lender to apply for a credit card, line of credit, or personal loan.

Many online lenders offer auto loans, small business loans, and even mortgage loans. You can apply for payday loans online with a lot of these lenders, too.

The primary difference is simply that online lenders work fully online, while traditional lenders usually offer both in-person and online services.

Many people also find that, when they work with an online lender, they can get better terms and interest rates than they can when they work with a different lender.

Benefits of Online Lenders

The lower interest rates and better loan terms are a huge plus for online lenders.

There are plenty of other reasons why you might want to borrow from an online lender, though, including the following:

  • More convenience
  • Faster approval times
  • Easier access and lower barriers to entry
  • Instant (or near-instant) rate quotes
  • User-friendly websites
  • Get your money sooner

Some online lenders also offer additional perks to convince you to work with them instead of a traditional lender.

For example, they might offer unemployment protection and money management courses to help you make sure you can pay your loan back on time.

Where do Online Lenders Get Their Money?

Online lending seems mysterious at first. It’s not terribly complicated, though.

Online lenders get their money in a similar way that other lenders get their money: through investors.

Investors, in this case, are the people who work with a particular lender and open a checking or savings account with them.

The lender pays those who deposit money into their counts a low interest rate in exchange for their deposits. They then use that money to lend to borrowers at a higher interest rate.

How to Choose the Right Online Lender

Are you interested in working with an online lender? Do you like the idea of lower interest rates, better terms, and faster approval? 

If you’re ready to work with an online lender, be sure to keep these guidelines in mind.

They’ll help you sort through all the lenders out there and find one that is reputable and will give you the best rates and terms possible:

Ask for Referrals

One of the best places to start when you’re looking for an online loan is the people who are already working with an online lender.

If you have a friend or family members who’s borrowed money from an online lender, ask them about their experience and whether or not they would recommend that lender to you.

Check Their Credentials

Once you have a few candidates in mind, it’s time to do some digging and looking into each lender’s credentials.

Check to see if there are any complaints against them with the Better Business Bureau and find out whether they are legally allowed to provide loans to people who live in your state. 

Consider Their Experience

Online lenders are a relatively new thing, so they’re not going to have the kind of history that a company like Wells Fargo will have.

At the same time, though, the longer they’ve been around, the better.

Try to avoid lenders that are brand new. Look for ones that have been open for a few years instead.

Check Their Contact Information

Online lenders operate online, yes, but they still have to have an office somewhere. Be wary of a lender that does not have any kind of physical address listed online. 

In addition to checking for a physical address, make sure they have a customer service phone number available as well.

Call that number and see if you are able to connect to a real person. If you can’t get in touch with anyone when you try to contact the lender, that’s a big red flag.

Read the Loan Agreement

Even if you’ve found an online lender that seems legitimate, don’t just sign the agreement without reading it first.

Go over the agreement from top to bottom and ask about any potential issues you notice before you agree to sign anything.

Compare Rates and Terms

Don’t agree to work with the first lender who seems like a good fit. Do some research and compare rates and terms from a few different online lenders.

It doesn’t matter if you’re trying to find out about payday loans or auto loans. It’s always best to shop around before you make a final decision. 

Consider Lending Requirements

Finally, consider each lender’s lending requirements, too.

Will they only loan you money if you have a certain credit score? Do they require pay stubs or copies of your tax returns?

Take all this into account before you apply and make sure you’re qualified to work with the lender that’s drawn your interest.

Apply for a Loan Online Today

Now that you know more about online lenders, how they work, and where they get their money, are you interested in taking out a loan from one?

If you do want to work with an online lender, be sure to keep the tips listed above in mind so that you’re working with a credible one.

Do you want to learn more about loans and money management? If so, we’ve got lots of articles on our website for you.

Check out the Money & Success section of our website today for all kinds of helpful information on how to build wealth and get better with money.