Personal loans can be a valuable tool if you need to consolidate debt or finance home improvements, and you can find these loans through banks and online lenders. For many borrowers, though, the best place to get a personal loan may not be a traditional for-profit financial institution, but a member-owned credit union.
If you’re considering taking out a personal loan, it’s important to research all borrowing options, including both banks and credit unions. That way, you can find the right loan for your unique needs and financial situation.
[Read: Best Personal Loans.]
Credit Union Loans vs. Bank Loans: Key Differences
Many credit unions, banks and online-only lenders offer personal loans, and the process is similar no matter which option you choose: You borrow a lump sum of money that you repay with interest in fixed monthly installments over a set period of time.
The biggest difference is that banks and online lenders are for-profit financial institutions, while credit unions are non-for-profit and member-owned. That translates to some important distinctions for personal loan terms and eligibility. But in short, credit unions are cost-effective, while banks and online lenders are convenient.
| Credit unions are best for: | Banks and lenders are best for: |
| Borrowers of all credit profiles. | Borrowers with good or excellent credit. |
| Finding low-cost, no-fee loans. | Finding a variety of repayment terms. |
| Borrowing small amounts of money. | Getting fast cash with same-day funding. |
Interest Rates and Fees
Since credit unions
are member-owned nonprofit financial institutions, they typically offer more favorable terms for borrowers than for-profit banks and lenders. “Profits made by credit unions are returned back to members in the form of reduced fees, higher savings rates and lower loan rates,” according to the National Credit Union Administration.
In the fourth quarter of 2023, the average personal loan rate was 10.78% at credit unions and 11.37% at banks, according to NCUA data. That may not seem like a huge difference, but a rate that’s just a half-point lower can save you hundreds (or sometimes thousands) while you repay the loan. Most credit unions don’t charge origination fees or prepayment penalties for paying off the loan early. Meanwhile, some banks and online lenders charge loan origination fees of up to 10% of the amount borrowed, which is typically deducted from the loan proceeds.
Still, there are plenty of options for no-fee personal loans whether you choose a bank, credit union or online lender. When shopping around for a personal loan, be sure to compare the annual percentage rate, or APR, which includes interest rate and fees.
Credit Score Requirements
Personal loans are typically unsecured — meaning they don’t require collateral — so both banks and credit unions look at your credit score to determine your likelihood of repaying the loan. You’ll usually need a credit score in the mid-600s to qualify for a personal loan, although having a higher score will increase your likelihood of approval on better terms.
For borrowers with fair or bad credit who can’t qualify for a personal loan through a traditional bank or lender, a credit union may be an option. While credit unions will still consider your credit score, they’ll often look at other factors, such as your financial history as a member. Even if you can’t get a personal loan from a credit union, many offer payday alternative loans, or PALs, that let you borrow up to $2,000 at a capped interest rate.
Loan Amounts and Terms
Banks may offer higher loan amounts and longer repayment terms than credit unions, especially when you compare large national lenders with smaller regional credit unions. Many credit unions have maximum loan amounts of $50,000, while banks and online lenders may let you borrow up to $100,000 or more. Credit union loans usually have repayment periods of two to five years, compared with up to seven years or longer through the bank.
If you just need to borrow a few hundred dollars, many credit unions offer small personal loans — on the other hand, most banks have a minimum loan amount of $1,000. But if you’re looking to consolidate large amounts of debt or finance a home improvement project over a long period of time, a for-profit lender may be more likely to offer the repayment terms you require.
Membership
You’ll need to become a member to borrow a personal loan from a credit union, which isn’t a requirement for banks or online lenders. Although credit union membership is often based on where you live or work, some credit unions are open to members who join an associated nonprofit group or simply open a savings account. Here are a few credit unions with nationwide membership that offer personal loans, and how you can join:
— Alliant Credit Union: Join Foster Care to Success. Alliant will pay the $5 membership fee on your behalf.
— First Tech Federal Credit Union: Join the Computer History Museum or the Financial Fitness Association.
— PenFed Credit Union: Open a savings account with a $5 initial deposit.
Of course, you aren’t limited to the options above. Research credit unions that serve your local community — for example, someone who lives or works in Richmond, Virginia, could qualify for membership with Virginia Credit Union. And if you’re an active-duty or retired member of the U.S. military, or the family member of a military member or veteran, or an employee or contractor of the Department of Defense, you can join Navy Federal Credit Union.
[See: Best Credit Unions]
Convenience
Banks are more likely than credit unions to offer access to a nationwide network of branches and ATMs. Additionally, banks and online lenders may offer more robust digital services, streamlining the application process and making it easier to track your repayment progress.
While many banks and lenders let you get prequalified online to see your estimated interest rate with a soft credit check, not all credit unions offer this option. Online banking can also mean faster loan funding, so you can get access to the loan proceeds within a few days of approval.
That’s not to say that all credit unions are stuck in the Dark Ages. Some credit unions offer the same level of convenience with online banking and mobile apps — but smaller regional branches may not.
How to Compare Personal Loan Lenders
Choosing the right type of lender for your personal loan will depend on a number of circumstances unique to your financial situation, but generally, you’ll want to consider the criteria outlined above, weighing cost against convenience. Here are a few questions you should ask yourself (and your lender) as you shop around for a personal loan.
How much will it cost? Credit unions, banks and lenders typically publish interest rates on their websites, but this is often their lowest “teaser” rate, not necessarily the rate you’ll get. Most (but not all) will let you prequalify to see your estimated interest rate and fees with a soft credit inquiry, which won’t hurt your credit score. A lower APR means you’ll pay less in interest over time, and a higher APR represents a more expensive loan.
What repayment terms are available? Consider how much you need to borrow and how long you will need to repay the loan. Longer repayment periods result in lower monthly payments but are usually more expensive in the long run. Shorter loan terms will have higher monthly payments but will cost you less in interest over time.
[CALCULATE: Estimate Your Monthly Payments on a Personal Loan]
What credit score do I need? Credit unions may be more willing to work with members who have fair credit than for-profit banks and lenders. Keep in mind that no matter where you decide to borrow a personal loan, having a higher credit score will increase your odds of approval and grant you more favorable terms, like a lower interest rate.
How long will it take to get a loan? Many online lenders offer personal loans with same-day or next-day funding upon loan approval. Some banks and credit unions also offer fast funding, but you’ll want to know the estimated timeline — especially if you need money to cover an emergency. If you’re in less of a hurry, taking more time to shop around can pay off.
What happens if I can’t pay? Take note of a lender’s financial hardship programs like loan deferment or the ability to skip a payment. Credit unions may be more willing to work with you if you’re having trouble repaying your loan. You might also want to read lender reviews to get a better idea of the customer service you can expect.
[Read: Best Low-Interest Personal Loans]
Next Steps: Personal Loan Application and Repayment
Once you’ve chosen the best personal loan offer for your needs, you’ll formally apply for the personal loan. While the majority of banks and credit unions let you apply for a personal loan online, you may need to visit a branch to complete this step.
A personal loan application requires a hard credit check, which will have a temporary negative impact on your credit score. You’ll also need to provide information confirming your identity and employment, such as a Social Security number and pay stubs.
If you’re approved for the loan, the funds will usually be disbursed directly into your bank account, although you may need to visit a branch or receive a check in the mail. And if you’re using a personal loan for debt consolidation, the lender may pay your creditors directly.
You’ll start repaying the loan shortly after receiving the funds, usually within 30 days, so be sure to take note of your payment due date to avoid missing a payment. Read your loan agreement carefully to take note of any late payment fees or prepayment penalties for paying off the loan early.
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Credit Union Personal Loans: Everything You Need to Know originally appeared on usnews.com
Update 02/16/24: This story was published at an earlier date and has been updated with new information.
