Where You Can Get Personal Loans And The Benefits And Drawbacks Of Each
The last quarter of 2022 saw a record rise in personal loans, with 22 million consumers having one as part of their portfolio. Although the number has decreased since then, the demand for personal loans is still high.
If you're considering a personal loan, there are three main types of lenders to look at: banks, credit unions, and online lenders. Your best bet is which one gives you the best deal - and where you prefer to manage your money.
The main points
Pre-qualifying with multiple lenders is key to getting a lower rate.
Banks offer lower rates on average but it's hard to qualify for them.
Online lenders have faster applications but may charge higher fees.
Calculate the total cost to determine which lender is the best option.
Online lenders
These digital lending platforms streamline the borrowing process, allowing you to compare rates and terms for personal loans, apply online, and usually receive a response the same day. It's also possible to get your loan within hours of approval, though most online lenders take 1-2 business days.
Many online lenders also offer pre-qualified. They offer you a customized rate and terms after a "soft" credit check, which doesn't affect your credit. However, upon completion of the loan, the lender will perform a "hard" credit check, which will temporarily lower your credit score by a few points.
Some online lenders are willing to work with people with low credit scores. In addition to reviewing your credit history and income, they may also consider factors such as your job and education when making a decision.
Pros
Simplified application process. With an online lender, you can apply for a loan in less than ten minutes from just about anywhere.
Immediate action. Since online lenders work digitally, many can process and fund your application in a matter of days.
Flexible Requirements Although some online lenders cater to customers with good to excellent credit, many of them offer their products to customers with lower credit scores.
Cons
Interest rates may be higher. Some online lenders charge greater maximum interest rates than traditional lenders. The lower your credit score, the more likely you are to get an interest rate above 30 percent.
There are no physical branches. If you'd prefer to speak with a loan officer in person, you may want to consider an alternative option - for example, a bank or credit union that has a physical branch in your area.
Better for
Tech-savvy borrowers who feel comfortable applying for a loan without a direct banker presence.
Borrowers are looking for fast financing.
Banks
Although online lenders now lead the personal loan space, traditional banks still lend tens of billions of dollars annually. Banks typically offer higher loan amounts than online lenders - but they also have stricter requirements.
Some banks may give you a discount if you have another account with them. Some banks, for example, provide a 0.25 percent reduction in your personal loan APR if you already have a checking or eligible savings account with them. If you like your bank or are a longtime customer, ask about this type of discount.
Even if you have been with a banking institution for many years, they will still check your balance. The bank will conduct a strict credit check and review your personal information before granting you a loan. However, many banks are following the example of online lenders and offering pre-qualification so that you can check your rates without affecting your credit.
Pros
a large amount of debt. Traditional banks usually offer higher loan amounts than other lenders, which can come in handy if you need to finance a large expense.
Offer more financial products. Traditional banks usually have a greater variety of financial products than credit unions and online lenders. As a result, this may be a better option if you prefer a one-stop shop.
Cons
More stringent borrowing requirements. Traditional banks often have stricter loan requirements than online lenders and banks. You may need a strong credit score to get approved.
You may have to apply in person. Some traditional banks require you to apply in person - this can be a pain if you don't like driving to your local branch.
Better for
Borrowers with good credit.
People who have a checking or savings account in a particular bank.
Credit unions
Rather than answering to shareholders, credit unions must act in the best interests of their members - the people who hold the accounts. Credit unions require membership to qualify for a personal loan, but this can be an easy hurdle. For example, some credit unions only require that you make a small donation to a charity or live or work in a specific area.
Because credit unions are nonprofit organizations, their mission can influence lending decisions, which is why it may be easier to qualify for a loan with them than with a traditional bank. This is especially true if you have average credit and are affiliated with the credit union you are trying to borrow from.
Credit unions offer smaller personal loans than banks and online lenders, but they may have lower interest rates. According to March 2023 data from the National Credit Union Administration (NCUA), the average interest rate on a three-year personal loan from a credit union is 10.02 percent.
The maximum interest rate for federal credit unions that are allowed to charge fees for loans is set by the NCUA and is currently set at 18 percent.
Pros
Eligibility Requirements are less stringent. Credit unions sometimes have less severe credit standards than commercial banks, which means they may be prepared to accept you for a loan if you have less credit.
Can offer lower prices. Because credit unions are member-owned, nonprofit organizations, they can offer personal loans at lower interest rates than some traditional banks and online lenders.
Cons
Membership required. To be eligible, you must be a member of the credit union you are applying to. Although membership requirements vary, some credit unions only require you to open a savings account, make a minimum deposit, or join an organization.
Small loan amount. Loan amounts are usually lower than traditional banks due to the increased credit risk absorbed by credit unions.
Better for
Credit union members who have average credit and don't need a large loan.
People with average credit looking for a more community based lending experience.
Bottom Line
Consider getting pre-qualified with at least three lenders. If you have a relationship with a financial institution that you enjoy working with, see if they can offer competitive personal loan offers.
Before you decide whether an online lender, bank or credit union is best, use a personal loan calculator to get an estimate of your monthly payments and the total cost of the loan. Once you know the size of the loan you can afford, research the lenders to find the one that works best for you.
