Within the past few years, we have seen a surge in online lending options. However, while consumers prefer the ease, convenience and automation process of online lending, they must be diligent in understanding which loans are secure. If you are thinking about applying for an online loan, it is important to understand all facets of security issues.
Payday Lenders vs. Alternative Lenders
In the past, online loans were automatically associated with payday loans, but that is no longer the case. Alternative lenders have emerged and created a new category which includes a newer, safer model for personal and business lending.
There is a stark difference between payday lenders and alternative online lenders. Payday lenders offer short-term loans (sometimes referred to as a cash advance or check loan). A typical payday loan has an APR rate of up to 400 percent and the borrowed amount is typically $500 or less. Repayment is generally due on the date the borrower receives their next paycheck.
Recently, new legislation was introduced to protect individuals’ rights against what is perceived as predatory payday loan practices. Because of this, payday lending companies have started to introduce installment loans. However, installment loans offered by payday lenders are still considered to be risky.
Popularity of Alternative Lenders
The popularity of alternative lenders has grown for two reasons:
- Strict Lending Requirements
The financial crisis of 2008 caused both community and large banks to either reduce or eliminate small business lending. Many banks were put in this position as stricter guidelines were imposed on them by the Federal Reserve as a way to prevent a similar financial crisis of occurring again. In addition, tighter restrictions and less small business funding has resulted in a lot of community banks closing their doors.
This group has an inherent trust of the internet and social media, and relies on technology as the conduit to make decisions. According to a Bank of America Small Business Report, in 2014, 14 percent of millennials chose alternative lenders over traditional banking sources.
Most alternative lenders such as Kabbage provide both personal and small business loans. They have emerged as an option for those seeking an alternative to both predatory lending and traditional banking. For example, with Kabbage, potential borrowers are able to apply for funding online through an automated process.
While the vast majority of online lenders are secure, here are some of the risks you should be aware of:
- High APR – For those individuals with less than stellar credit, online lenders such as payday lenders can charge up to 450-650 percent APR.
- Identity Theft – Payday lenders have long been the target of hackers because of the sensitive information they store, such as Social Security numbers, addresses and financial data. Reputable online lenders invest in more secure systems to prevent identity theft.
- Hidden Fees – Unscrupulous lenders will sometimes try to include hidden fees in the fine print.
- Scams – Unfortunately there are scams designed to target those who are in need of quick cash. Never send your personal data via an email.
There are many ways you can determine whether an online lender is safe. Here are some security features you should look for:
- Security Socket Layer (SSL) Encryption – This is the security technology that establishes an encrypted link between a web server and a browser. This means that the information passed between the link and the browser remains secure and private. Make sure that any site that requires any personal or business data has this on it.
- TRUST eCertified Privacy Certificate – This is a certificate that has been given to the online lender that signifies they have taken the steps to go through the process to protect your data. The certificate steps taken by the lender include a review of their data privacy management standards and a comprehensive review of their privacy practices. Additional steps include the use of digital property scanning tools to review the data collection process, a review of the privacy statement to ensure that the website privacy statement is consistent with the Trust eCertified Privacy Certificate standards and use of an ongoing privacy monitoring system.
- Better Business Bureau A+ Rating (BBB) – An A+ rating is the highest rating a business can receive from the Better Business Bureau and it is a good way for a potential customer to review a lender. This rating indicates that a business has received a scoring of 97 to 100 in such categories as complaint volumes, transparent business practices, competency licensing and complaint resolutions.
- Research the Lender – We can’t stress this aspect enough. When considering using an online lender, start by researching their domain and physical address to ensure they are a legitimate company. By searching their domain, you will also be able to review any customer complaints or data breaches. Also, make sure that any lender that you are contemplating providing your personal or business data to has complete contact information including a phone number and not just a general email address such as firstname.lastname@example.org.
In the digital marketplace, there are many online loan options available. It is up to you to make sure the lenders you are doing business with are secure and have safety measures in place to protect your information.
Have you used an online lender? Tell us about it in the comments below.