Personal loans give you access to a lump sum of cash that you can use immediately and then pay back with interest over a predetermined time period. A big appeal of personal loans is that they can be used for almost any purpose.
“Of the many credit products available to individuals, personal loans are the most enticing,” says Angelo DeCandia, professor of business at Touro University. “After all, it is an unsecured loan for discretionary use that can bail you out in an emergency.”
If you’ve decided a personal loan is the right choice for you, the next question on your mind is likely: “Where can I get a loan?”
You can get a personal loan from a brick-and-mortar bank, credit union, online lender or peer-to-peer lender. It’s a good idea to prequalify with multiple lenders before making your choice. Read on to learn about each of these options and some of their pros and cons.
[Read: Best Personal Loans.]
Brick-and-Mortar Banks
Banks may be the traditional choice when shopping for a personal loan. However, lumping all brick-and-mortar banks into a single category of personal loan lenders may be painting with too broad of a brush, says Sean P. Salter, assistant dean for assessment and associate professor of finance in Middle Tennessee State University’s Jones College of Business.
There are large nationwide banks and smaller community banks, and not all offer personal loans. For example, JPMorgan Chase Bank and Bank of America do not offer personal loans, while Citibank and Wells Fargo do. Banks may offer lower or higher annual percentage rates than some credit unions and online lenders, but this largely depends on the institution and your credit score.
Pros:
— Opportunity for face-to-face meetings. Brick-and-mortar banks that offer personal loans can be a good option if you prefer to work with your lender face to face.
— Potential to explain financial issues. “Brick-and-mortar lenders provide an opportunity for borrowers to plead their case above and beyond impersonal credit scores or job history,” DeCandia says. “In a face-to-face meeting, borrowers can demonstrate responsibility by explaining the purpose of the loan and how they will repay it.” Salter adds that you’re more likely to find a “sympathetic ear at a local community bank where decision making is local and not centralized at a national headquarters.”
— Existing customer discounts. If you are already a bank’s customer, you may get a customer relationship discount, such as 0.25 of a percentage point off the loan’s APR.
Cons:
— May require you to visit a branch. If you’re the type of person who prefers to handle everything online, it could be a drawback if the bank requires a branch visit to get a personal loan.
— May require new customers to have higher credit scores. New customers may need higher credit scores to qualify for personal loans than existing customers do.
Credit Unions
Though credit unions offer many of the same services as traditional banks, the two are distinct. Credit unions are not for profits owned by their members, or the people who use their services, whereas banks are for-profit institutions owned by shareholders. Being member-owned means that members get to vote on the board of directors, who determine how the credit union runs.
“Credit unions, as member-owned not-for-profit cooperatives, generally can offer more flexible terms and competitive rates,” says Ray Lindley, chief operating officer of Elevations Credit Union.
Pros:
— May offer lower costs. Borrowers may see lower interest rates and limited fees as compared to for-profit lenders.
— More lenient qualification requirements. “For consumers that qualify for membership in the credit union, this may be the best option if there are some complicating factors in the consumer’s application data,” Salter says. In general, the underwriting requirements are not as strict.
— Opportunity for face-to-face meetings. Like brick-and-mortar banks, credit unions may give borrowers an opportunity to explain their circumstances.
Cons:
— Need to be a member to apply. “Membership may require a fee, though it probably won’t be significant in relation to the size of most loans,” DeCandia says. This fee may be as low as $5, for example. Credit unions may also limit membership to certain groups, such as residents of a particular area or employees of specific companies.
— Borrowers with excellent credit may see lower APRs elsewhere. Online lenders and traditional banks may have lower minimum APRs than credit unions. This is part of why it’s a good idea to prequalify with multiple lenders before taking out a loan.
[Read: Best Low-Interest Personal Loans]
Online Lenders
As the name implies, online lenders provide internet-based lending services. While technically any bank or credit union can do this, online lenders are generally categorized as nonbank lenders. This means they cannot accept deposits from customers, but instead provide lending and credit services.
“Just like in commercial real estate when they say location, location, location, with online personal loans it’s easy, easy, easy,” DeCandia says. “With just a quick flick online, borrowers can quickly find lots of lenders with plenty of loan opportunities.”
Pros:
— Online application process. If you’d prefer to get a loan without needing to have a face-to-face conversation, online lenders can be a good option.
— Potentially low costs for strong applicants. “For consumers with exceptionally clean credit, very good debt-to-income ratios and other personal finance metrics, the online lender may be the cheapest option and the quickest processing time,” Salter says.
— May have fast funding. Depending on the lender, you may be able to get your loan funds by the next business day.
Cons:
— May have high interest rates and fees. “Borrowers with poor credit should be wary of exorbitant interest rates, fees, penalties and poor repayment options, all of which they are likely to encounter,” DeCandia says. “When a lender is eager to lend you money, there must be a reason.” In other words: There’s money in it for them.
— Limited personal relationship. It may be more challenging to explain your individual situation to an online lender.
[See: Best Personal Loans for Credit Card Refinance.]
Peer-to-Peer Lenders
Peer-to-peer lending, also known as P2P and marketplace lending, uses an online marketplace to connect borrowers and lenders. The difference between P2P lending and online lending is that P2P loans are funded by institutional investors rather than a single institution.
Pros:
— Online process. You can get a P2P loan online without needing to speak to a loan officer.
— Flexible qualification standards. You can typically borrow money through a P2P marketplace if you have a credit score of at least 580. You don’t need to be a member or part of any particular group, and the entire process is usually conducted online.
— Fast funding. Funding can be done in as soon as one business day.
Cons:
— May have high APRs and loan fees. P2P lenders can have higher interest rates than traditional lenders and charge loan fees, though borrowers with strong credit can find competitive rates.
— No personal relationship. With P2P lenders, terms and rates will likely come from automated systems and algorithms, which could make it harder for you to explain a unique financial situation.
How to Choose a Personal Loan Lender
“Choosing a lender for a personal loan really depends on the consumer,” Salter says. If you have “clean application data,” meaning no complicating factors, such as a low credit score or unpredictable income, you could probably use any of the above lending options.
“Complicating factors may make it necessary for a consumer to cast a wider net when searching for a loan provider,” he says.
When considering where you can get a personal loan, it’s important to shop around. Many lenders offer prequalification with only a soft credit check. You can start by doing an online search to review the various options available, and it can also be helpful to call potential lenders to get more details.
“Interest rates may vary based on someone’s credit history or ability to repay, and so talking about their individual circumstances could be the best thing they could do rather than just only relying on what they see on the internet or on providers’ websites,” Lindley says.
The right lender is the one that provides the best loan for your unique situation, DeCandia says.
“Things to consider are your credit score, the amount of money you need to borrow and the size of the monthly payment you will take on,” he says. “Of course, you should always go for the lowest possible interest rate with the least amount of fees relative to your requirements.”
Don’t forget to evaluate the full cost of the loan. “The true cost of a personal loan may include the interest rate, origination fees, late fees and prepayment penalties,” Salter says. “Consumers should make certain that they are comparing apples to apples in terms of the true cost of a personal loan.”
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