Online Loans vs. Traditional Bank Loans: How They Differ

Nowadays, financial assistance in the form of loans has become readily accessible to many. In the past, lending options were limited and only available for those who can comply with the stringent borrowing requirements. But, as the time changes, the landscape for lending money has grown lenient and easy to access.

Many lenders offer a gamut of loan services for all types of borrowers. Firstly, there is the traditional route, which involves getting a loan at your respective bank or credit union. On the other hand, there is also the modern route, which is done online through financial technology companies.

But aside from their different application processes, what else are the significant differences between the two?

What Are Online Loans?

Online loans can help you complete the whole loan process without even going inside a bank branch. This includes the prequalification, application, and funding process. Moreover, online loans most likely are unsecured personal loans. However, you can also opt to get other loan types online as well.

Like any other traditional lenders, each financial technology company that offers loans online, like Credit Ninja, has its own minimum eligibility and credit qualifications. Also, you can opt to check to see if you can prequalify for a loan through a soft credit inquiry that doesn’t hurt or affect your credit score. 

However, you might need to agree to get a hard credit inquiry to complete the loan application. This will certainly hurt your credit score. Furthermore, you might also be required to submit essential documents such as a government-issued ID as proof of your identity and other documents that can help prove your income.


  • Online loans tend to offer pre-qualification that don’t affect your credit score
  • It has a faster loan approval and disbursement (typically within 24 hours)
  • It has a lower operating cost, which means lower interest rates for potential borrowers


  • Application and processing are all made online. This means borrowers need to be comfortable with giving vital personal information with only minimal personal interaction

What Are Traditional Bank Loans?

Traditional bank loans and online loans work similarly. However, the former requires a good or excellent credit score for you to qualify. Once you apply for a traditional bank loan, they will evaluate your credit score, income, and credit history to know how much money they should lend you and the annual percentage rate (APR) you are qualified for.

The repayment schedule is mostly agreed upon during the application process. Furthermore, bank loan repayment terms most likely range from one to seven years. 

Some banks offer loans only to their existing customers. However, others will accept loan applications from almost anyone. Moreover, if you already have an existing good standing account with a certain bank, you will most likely receive a lower APR.

As mentioned, traditional banks usually offer borrowers with good or excellent credit scores with lower rates and favorable terms. The credit scores traditional banks want tend to range from 690 or higher based on a FICO scoring scale. Moreover, having a low debt-to-income ratio and multiple years of credit history will also improve your chances.


  • Borrowers who have an existing relationship with a certain bank would mean a higher chance of getting approved with favorable terms and lower interest rates
  • Traditional bank loans offer face-to-face services that help borrowers through the entire loan process


  • Traditional bank loans typically don’t have any prequalification option to see the loan terms and interest rates without affecting your credit score
  • It most likely has a higher operating cost since it maintains a physical location. This means they might offer potential borrowers with higher interest rates
  • It has a slower loan approval and disbursement process (might take several days or weeks)

Pointing Out The Difference

Below are the differences between getting a loan through an online lender or a traditional bank:

  • Getting a loan through an online lender means there is no in-person contact, while getting a loan through a traditional bank can offer you a personalized service.
  • Online lenders tend to have a fast loan application and disbursement. On the other hand, traditional banks might take a few days to process your loan.
  • Several online lenders offer only one or two loan products. Also, they tend to develop these products with a specific borrower in mind (poor credit borrowers, for example). Traditional banks can offer you a wider variety of loan products you can qualify for.
  • Online lenders usually have a lower operating cost, as they don’t need to maintain or build branches. That is why they can offer low-interest rates to potential borrowers. The same is not true when it comes to traditional banks.
  • Traditional banks might also offer low-interest rates if you can qualify. One of the reasons for this is that they can make money by selling other services or products like auto loans or a bank account. The same is not true when it comes to online lenders.

To Wrap It Up

Many financial technology companies or institutions are offering personal loans online. However, whether an online or in-person loan is best for you will depend on what you value the most. If you want to get the face-to-face experience, choosing a traditional brick-and-mortar bank is the way to go. But, if you prefer fast funding, opting for an online lender will certainly make more sense.



Shashank Jain, founder of good-name, a young and energetic entrepreneur has always been fond of technology. His liking for technology made him go for engineering in computers. During his studies, he learned & worked on different computer languages & OS including HBCD, Linux, etc. He also has a keen interest in ethical hacking.

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