Credits online or in the bank?

Two ways to take out a loan

Today there are two main ways to take out a loan: from a bank or from an online lender — a non-bank company that operates only on the internet. The line between them is gradually blurring: most banks in EU countries also accept loan applications online. But differences in terms, speed and cost remain.

A bank loan

Many people turn to their own bank, where they have an account. The bank can already see your income and expenses, so it finds it easier to assess your ability to repay. You can often apply in online banking and, if needed, get advice from a specialist at a branch.

Banks usually offer lower rates and larger amounts, especially for mortgages and large consumer loans. But their requirements are stricter too: you need a stable income and a good credit history, and the application may take anywhere from a few hours to several days to process.

A loan from an online lender

Online lenders work entirely over the internet: you can apply from your phone or computer, a decision often comes within minutes, and the money arrives the same day. They are just as obliged as banks to check your ability to repay, but the check is automated: it uses credit bureau data and often a bank statement that you share, with your consent, via your online bank.

Online lenders are more likely to lend to borrowers with a modest income or a less-than-perfect credit history. That comes at a price: their rates are usually higher than banks’, especially for fast loans for small amounts.

Which to choose

• You need money urgently and the amount is small — an online lender will be quicker but more expensive.
• You need a large amount over a long term — a bank usually offers better terms.
• You have a good credit history and a stable income — start with a bank: it will most likely offer a lower rate.
• The bank has turned you down — an online lender may approve the loan, but be sure to compare its cost and make sure you can pay on time.

The online format in itself does not make a loan more expensive: it is cheaper for lenders to operate online than to run branches and staff. The difference in rates comes mainly from which borrowers a lender serves and how high its risk is. So always compare the annual percentage rate (APR) and the total amount to repay, not the lender’s format.

How to avoid mistakes

The main advantage of searching online is that you can quickly compare offers from many lenders and find a better deal. But there are scammers online too. Before applying, make sure the lender is licensed by the supervisory authority in your country, and never pay any money before receiving a loan: genuine lenders don’t work that way.

Wherever you borrow, it is important to know in advance what monthly payment you can afford. You can compare banks and online lenders in your country in the catalogue: Credits in Latvia, Credits in Europe — North & West and Credits in Europe — South & East.