Key things to keep in mind when evaluating online loans and lenders...
One thing I’ve been surprised to learn since starting Borrowize is how skeptical most people are about online lenders. I don’t blame them!
For over ten years, online lending was run by unscrupulous companies looking to make quick money off desperate borrowers. Their deceptive practices tainted the industry, and now responsible lenders are having to re-gain the trust of the consumers.
This is why I started Borrowize. A lot of people need quality loans but are either too busy, too skeptical, or don’t have the financial knowledge to tell apart the good lenders from the predatory ones.
At Borrowize, we follow a strict set of guidelines when screening our lending partners. We do the research so you don’t have to.
In the next few weeks, we will be unveiling our WizeScore, which rates each lender based on several criteria.
Until then, I wanted to walk you through the main things to keep in mind when evaluating a loan. For a complete list of our trusted lending partners, check out our personal loan search.
It’s pretty straightforward to understand – the lower the interest rate the better. However, a lot of lenders are deceptive in how they present interest rate vs. APR (annual percentage rate). By charging fees up front, lenders can hike the APR quite a bit.
For example, a 1-year loan with a 10% interest rate and a 5% origination fee has an APR of 19.8%. That’s because they only lend you 95% of the amount you request yet you're required to pay interest on and repay 100% of the loan amount. To see how origination fees affect APR, check out our personal loan tool.
Everyone knows the trick – you get sold a product for one price only to be hit with hidden fees and additional charges.
While some fees are standard, there are some companies that make their money by charging excessive and sometimes hidden fees. These fees include origination fees greater than 10%, loan payment processing fees, and payment by check fees. Origination fees should ideally be zero, but anything in the low single digits is tolerable.
Before agreeing to the terms of a loan, make sure you understand all of the costs and fees associated with the offer. If they are not clearly outlined on the website (bad sign!), ask your loan provider for a full list of fees and penalties.
Prepayment fees make absolutely no sense. Think about it, why should lenders penalize you for being a responsible borrower? Lenders should be ecstatic that a lender is able to pay back a loan in full, plus interest, prior to its maturity.
People’s financial stability can change quickly, and a paying borrower can become delinquent in a hurry. Prepayment should be rewarded! It allows lenders to lend that money again and make more money.
For those wondering why lenders do this, it’s so that they can lock in a certain amount of profit for each loan. If a borrower pays back a 1-year loan after just 2 months, they only collect 1/6th of the interest.
You should avoid lenders that charge prepayment penalties at all costs. There are plenty of quality lenders out there that are flexible and reward smart financial decisions.
Not every borrower should get the same loan product. The purpose of a lender is to understand a person’s situation and be able to provide a financial solution to their needs. That’s why it’s so important for a lender to offer multiple products to people of different credit backgrounds. A one-size-fits all approach doesn't make sense. Your lender should provide flexibility when it comes to loan duration, interest rates, types of borrowers they lend to, payment options, etc.
For example, if your main priority is to have a low monthly payment, some lenders are willing to extend the term of the loan from 3-years to 5-years in exchange for a slightly higher interest rate. You will pay a bit more over the course of the loan, but the monthly payments will be lower.
If you are new to borrowing or are looking to improve your credit, it’s very important that the lender reports to the major credit bureaus. You want to be rewarded for good behavior so that you can build your credit history, improve your credit score, and graduate to low-cost, mainstream financial products down the road such as mortgages, car loans, and small business loans.
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