Online lenders often collect debt differently than traditional banks. Here’s what to consider

It can be challenging to find the right loan for your financing needs. Comparing interest rates, fees and other loan terms and conditions between multiple lenders is time-consuming and sometimes confusing. If you’re like a lot of borrowers these days, you may be considering online lenders as well as traditional banks. Here’s what to consider when dealing with online lenders.

Fist, you may want to consider comparing how the lenders on your list will try to collect your debt in the unlikely event you can’t repay your loans. That’s because online lenders can differ substantially from banks and credit card companies when it comes to collecting debts. Let’s start with the basics.

What is an online lender?

An online lender is exactly what it sounds like: a bank that operates solely online. There are no brick-and-mortar buildings for you to visit if you have a question or want to make a payment. Everything is done electronically and online.

The pros & cons of online lenders

Online lenders: the Pros

Simplicity & speed: One of the nice things about online lenders is that comparison sites exist, allowing borrowers to see exactly how loan terms compare across multiple lenders.

Convenience: You may not be able to complete your entire loan process online with, say, your credit union or small local bank, but with online lenders (and some larger traditional banks), the whole process can be handled while you sip coffee in front of your computer screen.

Easy pre-qualifying: You can frequently pre-qualify for a loan with an online lender without it affecting your credit score and with no commitment on your part, unlike most traditional banks and credit unions, which usually require a hard credit check. (Keep in mind that all lenders typically require a hard credit check before the loan is finalized.)

Your credit may be less important: Online lenders don’t always use traditional credit scoring methods to approve your loan, so on top of your credit score, they may consider things like your job, where you live and even your education when considering your qualifications.

Online lenders: the Cons

Cost: Loans from online lenders are typically not as cheap as those from credit unions or even some traditional banks. You may end up paying significantly more in interest rates for the pros mentioned above.

More complex loans may be, well, more complex: Are you looking for a secured loan or do you have a cosigner? These kinds of loans may not be as easy to process for online lenders as unsecured personal loans, so it’s good to know what is involved ahead of time.

Limited loan sizes: If you’re looking for just a short-term loan to get you through the month, an online loan may not help. Typically, it’s hard to find loans under $500, and when you do, the interest rates are quite high. Similarly, if you want to borrow large amounts of money, you may find few online lenders who offer what you’re looking for.

Trust, but verify: There are plenty of reputable online lenders out there whose interest rates and fees are reasonable. Beware of lenders, though, that say they won’t check your credit. You could be looking at paying annual percentage rates pushing 300 percent or even higher.

How online lenders collect past-due debt differently

One of the biggest differences between online and traditional lenders is how they handle collections if you fall behind or even default on your loan payments. These are things you may want to ask your lender about before taking your loan:

Your interest rate is your interest rate

If you run into financial trouble with a traditional bank loan, you can usually include it in a debt management plan (DMP) and get your interest rate reduced. However, with few exceptions, online lenders will not reduce the interest rates on your loans. Some online lenders may let you make payments directly to the agency managing your DMP, but this will just give you the convenience of your loan payment being lumped into one monthly payment with the DMP. Some online lenders will not even allow you to pay them through the DMP agency.

“Prosper, Lending Club and Sofi accept payments [through a DMP] but offer no concessions. It appears Avant is willing to work on interest reduction a bit, but it is on a case-by-case basis,” said Christopher Viale, president and chief executive officer of Cambridge Credit Counseling Corp. He sees an increasing number of consumers using personal loans to consolidate debt; many end up deeper in debt. Not being able to include this debt in a DMP can impede a borrower’s ability to resolve it.

They probably won’t sue you…

Some online lenders make it a policy to not sue, which can mean you may have more time to negotiate a settlement with an online lender than you would a traditional bank.

… but they could sell your debt.

Some lenders may just sell your delinquent account to a debt buyer. This can actually be a good thing for borrowers since the debt buyer may be willing to settle for less than what you owe since they bought your debt for less than face value.

What to know about some of the biggest online lenders

Here’s a quick look at four of the larger online lenders:

Lending Club

The largest online provider of personal loans in the United States, Lending Club specializes in peer-to-peer lending. As such, it does not allow its loans to be included in a DMP but also does not sue for repayment. You may be able to negotiate a good settlement to pay off your delinquent loan. This may be more likely after it is sold to a debt buyer. Learn more about how Lending Club collects debt here.

Prosper

The first peer-to-peer lender, Prosper tends to lend to consumers with good credit scores and fairly substantial incomes. However, the company does show leniency in approving borrowers with up to a 50% debt-to-income ratio. It has collection practices similar to Lending Club’s. Learn more about how Prosper collects debt here.

Avant

With a focus on personal loans, Avant often lends to consumers with lower credit scores than its online rivals will approve. Also, unlike the other online lenders, Avant may, on a case-by-case basis, allow its loans to be included in a DMP. It doesn’t sell accounts to debt buyers so you would negotiate a settlement with Avant directly. While you may get a fairly good settlement offer, be sure to get it in writing as Michael Bovee, a debt expert with Resolve, has seen Avant renege on verbal agreements. Learn more about how Avant collects debt here.

SoFi

A sophisticated lender, SoFi offers the largest loans of all the online lenders and also offers unemployment protection and career coaching. Like most of its competition, it does not participate in DMPs and, as of last year, does not sue for payment on delinquent accounts. You likely won’t negotiate a settlement directly with SoFi but with the debt buyer that acquires  your SoFi account. Learn more about how SoFi collects debt here.

What to do if you fall behind on payments with any lender

Financial woes can be one of life’s more stressful troubles, but it’s important to not ignore the situation and bury your head in the sand. These are some of the options you have available for getting your finances back on track with any lender:

Forbearance

A forbearance allows the borrower to take a pause in making payments on a loan. If the situation causing you to fall behind on loan payments is temporary, such as a layoff or a medical issue, some lenders will let you skip payments for a specific time frame. They will then add the missed months and the additional interest fees to the end of the loan period. It’s important to confirm with your lender that a forbearance will prevent a late payment from showing on your credit.

Debt settlement

As with bank loans and credit cards, you may be able to negotiate a settlement on your personal loan account. To do this, you’ll have to be behind on payments, which can hurt your credit score. Debt settlement, however, may be a good option, and there are effective ways to negotiate a beneficial settlement.

Related article: How to settle with a debt collector

Bankruptcy

While many people try to avoid bankruptcy because of the stigma and the negative impact on your credit, there are times when it is the best option. If you’re approved for Chapter 7, you can eliminate all of your unsecured debt, including personal loans.

As you consider ways to deal with your debt, you may want to get advice before making any decisions. “The No. 1 thing we tell consumers when talking to us and considering a loan is, ‘You can’t borrow your way out of debt,’ ” said Christopher Viale, president and CEO of Cambridge Credit Counseling Corporation. “Discipline and using some type of debt resolution program is the way to go, and talking to a credit counselor is your best place to start.”

Why Resolve?

If you’re past due on your personal loans, we’re here to help. Become a Resolve member and we’ll contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more.