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What is the best place to get a personal loan?

Yahoo Personal Finance· Getty Images
15 min read

When you’re looking for a personal loan, shopping around can help you get the lowest rate and best repayment terms. But what’s the best place to get a personal loan?

Banks aren’t your only choice. Though banks may be a good option for a personal loan, credit unions and online lenders are sometimes a better fit for your needs and preferences.

Let’s look at banks, credit unions, and online lenders to determine the easiest place to get a personal loan — and when.

Financial institutions maintain different criteria to determine who qualifies for secured and unsecured personal loans. Criteria include your credit history, credit score, debt-to-income ratio (DTI), and personal information such as your identity and income.

If you don’t qualify for a personal loan from one type of lender, you may still qualify with another — which is a good reason to explore all your options before you sign on the dotted line.

Banks are privately owned or publicly traded for-profit financial institutions that:

  • Allow customers to make deposits into savings accounts and checking accounts, and offer products such as certificates of deposit (CDs) and money market accounts

  • Offer different lending options, including personal loans, auto loans, mortgages, lines of credit, and commercial loans

  • Provide financial services such as retirement planning and wealth management

Individual banks set their own methodology for determining who qualifies for a personal loan, but in general, they prefer borrowers with good to excellent credit — a credit score of 670 to 739 or higher. Approval also depends on meeting a bank’s minimum income requirements and DTI ratios. Some banks may require you to be an existing customer to qualify for a personal loan. In other cases, banks may offer perks — like lower personal loan interest rates, an increased borrowing cap, or more loan term options — for being an existing customer.

Most personal loans have a fixed rate, but interest rate or annual percentage rate (APR) varies from bank to bank, depending on your creditworthiness. Though many interest rates hover around the national average, rates can range anywhere from 6% to 36% depending on the bank and your financial strength.

In some cases, a bank may require you to visit its physical location to sign for the loan — even if you applied online. However, this can help you establish a relationship with your bank, making applying and qualifying for future financial services easier.

Who is a personal loan from a bank best for?

A personal loan from a brick-and-mortar bank is ideal for borrowers who have:

  • Good to excellent credit

  • An open account or existing relationship with the bank

  • Shopped around and decided the bank offers the most competitive loan

  • A need or preference for a bank with a local and physical presence

Credit unions are membership-only not-for-profit financial institutions. With a credit union, each member is also a part-owner. Financial services include:

  • Checking accounts and savings accounts (called “share” accounts)

  • Lending, including personal loans, mortgages, and other types of loans, such as payday alternative loans (PALs)

  • Credit cards, investment and retirement accounts, and other common banking services

Because credit unions are not-for-profit, any profits made are reinvested in the organization’s membership. This may result in low fees, favorable savings rates, and the lowest interest rates.

The National Credit Union Administration (NCUA) oversees credit unions nationwide and imposes an 18% limit on loans made by federal credit unions. In other words, the maximum interest rate of a personal loan offered by a credit union is 18% — though you still have to meet the credit union’s eligibility requirements, such as income, DTI, and credit score.

In general, credit unions limit membership to certain groups of people, including those employed by a certain company or in a certain industry, those who live in a certain geographic region, those who belong to the same group or groups, and family members of existing union members.

The reason? Credit unions focus on the financial well-being of their members. This means many credit unions are active in their local communities by providing financial education and other forms of assistance and guidance. As a result, credit unions may have limited physical locations, though they may also be deeply involved in the community. In some cases, you may have to visit your local credit union to sign for a loan you’ve been approved for.

Who are credit unions best for?

A personal loan from a credit union is best for:

  • Borrowers who meet the membership requirements of a local credit union

  • Individuals who want to build a relationship with a community-oriented financial institution

  • Borrowers who want a personal loan with a competitive interest rate for being a member of the credit union

Online lenders, digital banks, and neobanks are for-profit financial institutions only accessible online. These “fintech” organizations blend finance and technology to offer a fully online banking experience, improve convenience, and offer low-interest loans (thanks to minimal overhead). Online lenders offer financial services that include:

  • Checking and savings accounts

  • Lending options including unsecured and secured personal loans and peer-to-peer (P2P) loans

  • Credit cards, investment and retirement accounts, and other financial services

Some online lenders only offer loans, lines of credit, or credit cards; they don’t accept customer deposits. Because these sorts of lenders aren’t full banks, they’re subject to fewer regulations. Many online lenders offer loans with a specific loan purpose — debt consolidation loans or home improvement loans, for example.

Online lenders generally have low requirements for those looking for a personal loan. This means a borrower with bad credit, a low credit score, or a spotty credit history may still qualify for a personal loan from a neobank. Loan approval and funding may also be quick, with some lenders providing next-day funding.

The kicker? Some online lenders cap the maximum loan amount you can borrow to a small amount — for example, $5,000. Online lenders that aren’t considered banks (or aren’t partnered with a bank) aren’t insured by the Federal Deposit Insurance Corporation (FDIC), which means any funds you deposit are not protected.

In addition, personal loan offers made by an online lender may have a high APR compared to other types of financial institutions. Neobanks may also assess other payment fees that aren’t always common with personal loans, including origination costs and prepayment penalties.

Who are online lenders best for?

Personal loans from online lenders are best for borrowers who:

  • Have trouble qualifying for a loan from a bank or credit union

  • Want to explore different types of personal loan options, like P2P lending

  • Prefer the convenience, accessibility and ease of an online application process

  • Don’t do any banking in person

When comparing personal loan lenders, there’s no one right choice between banks, credit unions and online lenders. It all depends on what you’re looking for, your financial situation and your banking and lending preferences.

Determine why you need a personal loan — and how much

Personal loan funds may be used for a variety of reasons, such as refinancing your debt, paying for a major purchase or financing home improvements. Of course, the amount you need to borrow depends on your reason for taking out a loan in the first place — and not all personal loan lenders will be able to offer the right size loan for your needs.

For example, some banks and credit unions don’t offer small personal loans, so you may have a hard time borrowing less than $1,000. On the flip side, online lenders may approve you for small loans — though they may cap the maximum at an amount lower than what a bank or credit union would approve.

In other words, before you choose a lender, you need to determine your purpose for a loan and how much you want to borrow. This can help you narrow your options when searching for the best loan provider.

Banks and credit unions often extend favorable personal loan terms to existing customers or members — if they don’t require you to have a bank account with them already. In many cases, submitting a personal loan application to your existing financial institution may be the best way to borrow money.

If you have an existing relationship with your bank, you may even be able to negotiate a lower interest rate to get yourself the best personal loan possible. How? By demonstrating a good credit history and lengthy record as a customer or member — and by sitting down to explain your situation and need. It’s not always a guarantee that this will help, but asking doesn’t hurt.

Even if you get offered attractive loan terms from one financial institution, you should still shop around to secure the most competitive rate possible. Though applying for a loan generates a hard inquiry that can impact your credit, multiple inquiries within a short timeframe, and for the same reason, are generally only counted as one inquiry. This means you have a window in which you can rate shop to find the best deal.

You may even be able to prequalify for a loan. During prequalification, a lender conducts a soft credit check and reviews your basic financial information (such as income and employment status) to tentatively qualify you for a loan. This means there’s no hit to your credit, and you can get some idea about the interest rates a lender may offer you.

And that means considering multiple types of lenders. Figure out your preferences for what you want in a lender (for example, if they have local branches or provide next-day funding), then compare:

  • Eligibility requirements: Minimum credit score requirements, DTI ratio and income, as well as other requirements (like being an existing customer or living in a certain area)

  • Minimum and maximum loan amounts: The minimum amount you need to borrow and the maximum you can borrow

  • Interest rates and APR: What you pay for borrowing money

  • Loan terms: The number of monthly installments you must make to pay back the loan. In general, the shorter the term, the higher your monthly payment, but the less interest you pay overall, whereas a longer term results in lower monthly payments but more overall interest.

  • Fees: Additional costs on top of the loan principal and interest, such as origination fees, late fees and prepayment penalties

  • Customer service and features: How easy it is to get help paying your loan, online banking features, autopay discounts, unemployment protection and credit score monitoring

Before you finalize a loan, make sure the lender is reputable and isn’t taking advantage of you. Banks and credit unions are both regulated by the FDIC and NCUA, respectively, and must adhere to certain rules and regulations. In addition, lenders — including neobanks — must follow the federal Truth in Lending Act (TILA), which requires them to provide you with documentation about your loan such as interest rate and repayment terms before you’re legally bound to pay it back.

Where things may get fuzzy is with some online lenders — those that aren’t banks or aren’t partnered with one. To make sure you’re working with a legitimate online bank, avoid lenders that:

  • Offer guaranteed approval before you even apply

  • Require fees or payment upfront

  • Aren’t registered in your state (which you can check by contacting your state's bank regulator)

  • Cold-call you with a loan offer

  • Pressure you into applying or signing for a loan

You may also check websites like the Better Business Bureau, Consumer Reports and customer reviews on websites like Google Maps and Yelp.

Payday loans are short-term, high-interest loans that are, in general, due on your next payday. Payday loans tend to be small — around $500 or so — and are paid back through a post-dated check or by giving the lender authorization to debit your bank account on the agreed-upon due date.

But payday loans may be dangerous. They carry high APRs of nearly 400% and may also come with excessive fees. In some states, payday lenders can roll over or renew a loan, charging fees to extend the due date past the next pay period, which can trap consumers in a cycle of debt.

Payday lenders, in general, don’t look at your credit or personal finances when you apply for a loan. They only consider your income (since repayment is based on the lump sum of your next payday). And because it’s common to need a payday loan when you’re in a pinch — for example, if your car broke down or you have unexpected medical bills — it’s easy for an unscrupulous lender to take advantage.

Some states prohibit or regulate payday loans, capping the maximum interest rate and fees you can be charged. Still, payday loans are rarely the best choice, even if you’re strapped for cash, so it’s best to pursue other options first, including personal loans or borrowing money from a friend or relative. Some credit unions offer payday alternative loans, which are small, short-term loans that can help cover emergencies without taking advantage of your situation.

personal loans

There’s no one right place to get a personal loan. You should shop around and prequalify for a loan at a few banks, credit unions and online lenders. Compare interest rates and APRs, repayment terms and any fees you may end up on the hook for.

Consider other features too, like convenience (for example, access to online banking or the availability of in-branch customer service), location and proximity and the type of relationship you want to have with your lender.

Getting approved for a personal loan and receiving your funds can take a few days depending on your lender. In general:

  • Banks and credit unions may take up to one week to approve and fund a personal loan.

  • Online lenders may take up to five business days to approve and fund a personal loan.

Some lenders can approve and fund your personal loan on the same day you submit an application. You’ll speed up the process by making sure your application is accurate and complete.

If you have poor credit (or no credit at all) and don’t qualify for a personal loan, ask the lender if you can apply with a co-borrower or co-signer. A co-borrower or co-signer should be someone you trust who has at least fair credit.

When you apply for a personal loan with a co-borrower or co-signer, the lender looks at their credit history and score as well as your own. If they meet the lender’s requirements, the lender may be more willing to approve the loan. Just remember, both you and the co-borrower or co-signer are responsible for paying back the loan in full and on time.

If you don’t have anyone to serve as a co-borrower or co-signer for you, consider taking out a credit card, borrowing from friends or family or, if possible, asking for a lower loan amount.

Applying for and taking on a personal loan will show up in your credit reports in several ways:

  • Creating a hard credit inquiry: When you apply for credit or debt (like a personal loan), the lender asks a credit bureau for a copy of your credit report. This request generates a credit inquiry, which is reported on your credit report. Too many inquiries in too short a time can make lenders question your financial stability, though inquiries are removed from your report after two years. Hard inquiries make up 10 percent of your credit score.

  • Contributing to your debt-to-income ratio: The more debt you have, the less disposable income you have available to take on more. Your outstanding credit and loan balances increase your DTI ratio, which can make it difficult to qualify for additional credit or loans until you’ve paid down some of your debt. In general, lenders prefer borrowers with a DTI of less than 36 percent, though some may allow a DTI closer to 50 percent.

  • Recording late or missed payments and defaults: Your credit report includes negative marks, like late or missed loan payments or a loan default. This is why it’s important to make sure your loan is affordable, including any fees. Late payments have the biggest impact on your credit score, contributing to 35 percent of your total score.

But personal loans may also improve your credit:

  • Lenders like to see a diverse credit mix, which means you can handle different types of credit and debt. Credit mix makes up 10 percent of your credit score.

  • Paying your loan on time establishes and builds your credit. This reduces your risk to lenders and shows that you fulfill your debt obligations.

  • Taking out a personal loan may decrease your credit utilization ratio, a comparison between how much credit you’ve used vs. how much you have available. Though personal loans don’t do this directly (since they’re a type of installment loan vs. a type of credit), they can reduce your credit utilization if you use them to consolidate debt from revolving credit like credit card debt.