Weighing the Risks of Online Loans


When someone needs money quickly, an online loan seems like a simple and fast solution. Unfortunately, it comes with tremendous risk. If you are considering taking out an online loan, don’t let the ease of the process lure you in. Here are some of the risks you need to be aware of from online loans.

1. Astronomical Interest Rates

By far the biggest risk of an online loan is the high interest rate that they come with. While each loan product is unique, the interest rate is at the discretion of the lender and is based on your credit score. Also, the way the APR is listed can be deceiving. It may not include all the fees and the total costs over the life of the loan. Also, Investopedia warns that some lenders will use precomputed interest, which means the monthly interest charged is based on your original loan amount, not the remaining balance. This gets costly quickly.

2. High Upfront Fees

In addition to the high interest, online loans, especially online payday loans, often come with high upfront fees. Loan origination fees are one of the most common, and again these are at the discretion of the lender. They can be quite high even with the best online loans, so read all the fine print.

3. Risk for Identity Theft

When you get a loan through your bank or credit union, the lender has a long list of privacy regulations and rules that must be followed to protect your personal and financial information. When you get a loan through an online lender, you have no knowledge of these rules. It is very possible that your personal and financial information will be compromised, especially if you do not research your lender well.

4. Direct Debit Payments

US News and World Report warns that many online loan structures are set up to be repaid using electronic withdrawals directly from the borrower’s bank account. If you give agreement to this, then need to change your payment terms, you may find it difficult to do so. Also, if your lender tries to make the debit and there are insufficient funds to cover it, they may continue to make the debit, racking up the overdraft fees and further hurting your financial situation.

5. Prepayment Penalties

Paying of debt early is good, right? Not in the eyes of an online lender. Because of this, many will charge prepayment penalties. If you are seriously considering this loan, make sure that there are no penalties if you pay it off early.

6. Harsh Collection Tactics

Finally, once they lure you in to get the loan, online lenders are not your friend. They will use harsh, harassing collection tactics to try to get the money they are owed. If you are struggling to pay your mortgage or rent, the lender does not care. They will continue to withdraw the money and harass you if they are not able to until the bill is paid in full.

Online loans are risky, but they are definitely tempting because of their ease. If you find yourself in a difficult situation with an online lender, Oaktree Law can help. Contact us today or call 562-219-2979 for a free consultation to discuss your situation with a skilled bankruptcy attorney in Los Angeles.