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Key takeaways
- Both banks and private lenders offer personal loans with rates and terms that rely on your credit and finances.
- Banks tend to be a solid pick for established borrowers with a positive credit history. Perks tend to include lower rates and more customer service options.
- Private lenders can be a great choice for borrowers who need funds fast. If you need more lenient approval for whatever reason, this may be an option to explore.
- Whatever you decide, remember that there are alternatives to personal loans that may be more affordable. Interest rates can be high for this type of credit, though not as high as for many credit cards.
When choosing a personal loan lender, you can find options from traditional banks and online lenders. Banks typically offer better rates and the added security of working with a well-established lender, but online lenders are often quicker and easier to qualify with.
The best option for you depends on your finances and funding needs. The best personal loan rates will be reserved for borrowers with excellent credit, though you can find options no matter your credit score. You should also consider additional features like minimal fees and in-person service when comparing banks versus online lenders.
Statistics
- Average interest rates for online lenders range from 5.99 percent to 35.99 percent.
- Rates for personal loans from banks range from around 7.50 percent to 25 percent.
- 49 percent of personal loans in 2022 were issued by banks, according to a report published by the Federal Reserve.
- Finance companies, including online lenders, issued 23 percent of personal loans, according to the same report.
Comparing banks vs. online lenders
Banks
- Lower interest rates
- Slower application process
- Rigorous approval process
- More regulated
Online lenders
- Higher interest rates
- Faster application process
- Easier approval process
- Less regulated
Bank loans tend to be more highly regulated, meaning eligibility criteria are less lenient than with online lenders. They also tend to take longer and often require in-person visits to finalize the loan. Since getting a bank loan is often more rigorous, banks can typically offer lower interest rates and provide perks for existing customers.
Online lenders are less regulated than banks, allowing for a faster application process and more lenient eligibility requirements. However, online lenders tend to have higher average interest rates and more fees. The primary advantage of an online lender is its convenience. You can complete the entire process online and funding is typically available within the week.
Deciding which is right for you
Before choosing which type of lender is right for you, there are many factors to consider. Shop around and compare rates from multiple lenders first. You will need to consider the rates, loan terms, requirements, and fees. You also need to make sure you know your credit score and are confident about what you can afford before applying.
Bank pros and cons
Getting a personal loan from a bank may be the best move for you if you have an existing relationship with one, you have good to excellent credit and you have time for a longer application process.
Banks may offer lower interest rates on their personal loans as well as other perks for existing customers. They also frequently have in-person customer service and are more highly regulated than online lenders.
Pros
- Lower interest rates: Rates are typically capped at a lower amount for banks than they are for online lenders. The maximum APR may also be lower.
- Potential rate discounts: If you are an existing customer, you may qualify for a rate discount if you choose to sign up for automatic payments.
- In-person service available: Unlike online lenders, banks offer both digital and in-person customer service at their branch locations.
Cons
- May not offer prequalification: Some banks don’t allow you to prequalify for a loan, making it more difficult to compare rates and terms.
- More strict requirements: Banks also tend to have stricter eligibility requirements. Borrowers with bad credit or limited credit history may have difficulty qualifying.
- Longer processing time: Banks typically take longer to process personal loan applications — if they’re offered at all — and you may have to visit a branch to apply.
Online lender pros and cons
Getting a personal loan from an online lender may be better for you if you are worried about being able to qualify, need money quickly or prefer the convenience of a fully online application.
For new borrowers, prequalifying could provide a better understanding of your financial situation and your ability to borrow. That said, many banks also offer the ability to prequalify, so you can compare your rates with both and choose the best offer.
Pros
- Prequalification available: One of the biggest benefits of online lenders is that they typically allow you to prequalify. This process allows you to see what rates you may be eligible for based on a soft credit pull that does not impact your credit.
- Easier to qualify: Some online lenders have less strict requirements than banks, especially if you need a bad credit personal loan. Rates may be higher, but if you need the funds and can afford to make payments, they can be helpful.
- Educational resources: An online lender may have information on financial skills alongside various calculators, informative videos and other financial literacy tools.
Cons
- No in-person customer service: To keep operating costs low, online lenders don’t have in-person branches. Instead, you will need to call or email if you need help with your loan.
- Higher interest rates: Since online lenders typically have less strict eligibility requirements, you may face higher interest rates. However, there are many online lenders who offer rates on par with bank loans.
- Potential scams: Because online lenders tend to be less regulated, make sure you choose a legitimate lender. To avoid personal loan scams, compare top lenders and read customer reviews before choosing a lender.
Other places to take out personal loans
While banks and online lenders are two of the most popular personal loan providers, there are other options — including alternatives to personal loans.
Credit unions
A credit union is a member-owned financial institution. You generally need to be a member to qualify for a personal loan.
Credit union personal loans often offer lower interest rates and fees than banks, and the application process is a bit easier once you are a member. To join, you will need to open a bank account and provide a government-issued ID, among other information.
Peer-to-peer (P2P) loans
Peer-to-peer loans are loans issued by an individual or company. P2P lending platforms allow you to submit a single application and be matched with lenders that might work for you. This is a good option if you are having trouble qualifying elsewhere or if you want the ease of submitting one application and having lenders come to you.
Buy now, pay later loans
Online retailers often offer the option to pay with a buy now, pay later (BNPL) app. This can be a good choice if you qualify for an interest-free period, and you can split larger payments into two or four equal installments.
However, BNPL apps won’t be useful if you need to cover an emergency expense or bill. Because they are so limited — and depend largely on where you shop — they will only be useful for shopping.
The bottom line
Some borrowers may find that their needs are best suited by a bank’s competitive rates and customer service. Others are better served by the speed and ease of an online lender.
Be sure to look into both options and the alternatives before borrowing a personal loan. Compare interest rates from multiple lenders and consider the terms carefully before you borrow.
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