How to Use Online Loan Sites

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As banks tighten lending standards to reduce risk and make loans more expensive, consumers are flocking to online lending channels.

Whether borrowers seek to acquire a car loan, student loan, small-business loan, mortgage or new credit card, there are lots of resources online to compare interest rates. Consumers can also access capital from private lenders by showcasing themselves as prime loan candidates on sites such as E-Loan.com, RaiseCapital.com, Prosper.com, Fynanz.com, LendingClub.com, SimpleTuition.com and Zopa.com.

Consumers have caught on.

RaiseCapital.com has seen page views climb nearly 600% since the start of the year and has more than tripled its count of unique visitors. SimpleTuition CEO Kevin Walker says that while traffic to the site had been growing fast even before the credit crunch, is now quintupling instead of doubling.

Walker suggests that consumers "more than ever shop around, because lenders are more than ever adjusting their prices" as interest rates and market conditions fluctuate. But he adds, borrowers will have to act fast to take advantage of low rates when they occur, because "they may not last long."

Here are some tips for those who are seeking a loan online:

1. Beware of sites set up to take advantage of struggling borrowers. Banks are not the only ones charging high interest rates -- many of the peer-to-peer lenders also bid up rates to levels that low-income folks with bad credit are likely not able to afford.

"Payday-lending" sites such as CashNetUSA.com offer small, short-term debt at astronomical rates -- for instance, 521% APR with a $20 fee on a $100, two-week loan. The site argues that the loan could cost more if it's being used to pay off balances that will otherwise incur late fees, though there is almost certainly a less expensive alternative.

2. Review terms and conditions very carefully. Even if the interest rate is low, there may be other fees attached to a loan or simply for signing up on a Web site that are not prominently advertised. Check out the policies on missed or late payments -- if the interest rate surges from 8% to 80% as a result, or if steep fees are attached, it might be best to avoid the debt. Also note what steps are in place in case the site goes under: Are debt obligations kept the same, and who will then service the loan?

3. Those with good credit histories may get better opportunities online, even if they get approved in the bank. For instance, FirstAgain.com lends only to those who have five or more years of "significant," blemish-free credit history with various types of debt -- credit cards, vehicle loans, mortgages and so forth. The site's median customer is 40 years old, earns a salary of $110,000 per year, has proven job stability and has a credit score in the mid- to upper-700s and an 82% chance of being a homeowner.

As a result, FirstAgain, whose capital comes through a warehousing agreement with Merrill Lynch (MER), is able to offer four-year auto loans at a rate of 6.15%, vs. a national average of 6.58% (according to BankingMyWay.com). Spokesman Peter Meade says most of the rates are "very competitive."

4. Check out the history of the site and where capital comes from if it's not a peer-to-peer lender. While you might not want to rule out smaller start-ups completely, sticking with names you recognize and trust can provide peace of mind when giving personal information to a nameless, faceless entity. Scope out the Web site to see whether there is an address and phone number to reach out to customer service with questions or concerns in case a problem arises.

5. Review your other options if rates or fees are too high. If you've been turned down by the bank and your credit score is too low to get a competitive rate online, ask yourself whether you can do without the loan or seek out friends or family members with some extra cash in their pockets who might offer a better deal.

Even that type of loan has an online destination: Virgin Money services loans between friends and family members with documentation, a repayment schedule, reminders and online banking transfers. However, its servicing fees start at $99 a year, with additional $9 fees per payment.

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