If you want to get the best rate on a personal interest loan, you can find the most attractive offers if you have a strong credit history. But you may be wondering, where are the more favorable rates: at a bank or with an online lender?
The truth is there is no definitive answer since rates are determined based on a number of factors such as your credit status, the length and amount of the loan, and whether you have an existing relationship with the lender. Plus, lender rates fluctuate — as does your personal credit score — so the ideal time to shop around is just before you’re going to apply.
“Even within one institution, the interest rate for a personal loan might vary widely based on your credit history (from 7% to 30%, for example),” says Annie Cole, financial coach and founder of Money Essentials for Women, and the author of “101 Ways to Earn More, Build Wealth, and Live Rich in Your 30s.”
Learn more about personal loan interest rates at banks and online lenders and how to ultimately decide which is best for you.
[Read: Best Personal Loans.]
Personal Loan Rates
In general, personal loan rates are almost always lower than the interest on a credit card, but they can still add substantial costs to your borrowed amount. You can find a wide range of advertised rates from around 7.99% up to 30%.
Do Banks Offer Better Personal Loan Rates?
If you have an existing relationship with a bank, you might be able to qualify for a rate discount and get a lower rate than you would with an online lender, says Gates Little, CEO and president of altLINE and The Southern Bank Company. “If you have the time to go through a slightly longer application process, a personal loan from a bank could be the best option, especially if you have a great credit history,” Little says.
Banks are also highly regulated, meaning they are less likely to have hidden fees, he adds.
A Note About Credit Unions
In September 2024, the average credit union rate for a 36-month unsecured fixed-rate loan was 10.89%, compared to 11.94% at banks, according to the National Credit Union Administration. In other words, credit union members may be able to access lower personal loan rates than they would get at a bank.
Credit unions are member-driven and non-profit, so they are able to lend with lower rates and, in many cases, fewer fees.
[See: Best Credit Unions]
It’s Worth Researching Online Lenders
Because they don’t have the overhead costs of physical branches, online lenders may also pass those savings along in the form of lower interest rates. However, just like with banks, the lowest interest rates are typically reserved for people with excellent credit.
If you can get an interest rate that’s favorable for you, the other benefits of using an online lender might be worth it. In fact, in JD Power’s 2024 U.S. Consumer Lending Satisfaction Study, online lenders dominated the list and took three of the top four ranking spots: American Express (No.1), Discover (No.2) and SoFi (No.4).
For starters, many online lenders have streamlined applications that can be completed quickly and without having to get on the phone or set up an appointment. “An online lender can be a good option if you’re strapped for time,” says Gates.
Some lenders can even approve your application and send you funds the same day, depending on your situation and timing.
What’s also notable about online personal loans is there may be more flexibility for people whose credit is not ideal. Online lenders aren’t as strictly regulated as banks, and may use alternative underwriting criteria that go beyond credit reports. So they may be able to offer loans to borrowers who might not get approved by a bank or a better interest rate.
One more appeal of online lenders is that you can comparison shop, and many lenders will provide a rate quote without a hard inquiry on your credit.
If you decide to try the online lender route, be sure to do the proper vetting to avoid potential scam sites. “Take the time to read customer reviews and research the top vendors,” says Gates. Otherwise, you could be hit with costly hidden fees or unfriendly terms.
[How to Get a Small Personal Loan]
How Important Is the Interest Rate?
When shopping for a personal loan, the interest rate is probably the top factor that most people should consider, and that may ultimately point you toward going with a bank or credit union over an online lender. But you always want to consider other factors, especially if the interest rate difference is negligible.
Unlike with a 30-year mortgage, where a half-percentage-point difference can translate to tens of thousands of dollars over time, the difference on a short-term loan might not be significant enough to keep you from going with your preferred lender.
Let’s say you need a three-year $10,000 loan and find one lender with a 7.5% rate and another with an 8% rate. For other reasons, you feel more comfortable going with the institution that has the higher rate.
A borrower with a loan that was a 7.5% APR will pay $1,198 in interest over the three years of that loan. If the APR was 8%, that person would pay $1,281 in interest. That’s a difference of only $83 (or $2.30 per month). “In such a case, the small difference in interest doesn’t have a huge impact,” says Cole.
Bank or Online Lender for Personal Loan
Exploring multiple options is always a good idea for consumers looking for a personal loan. Not only will it help you find the best rate, but you can compare other factors like fees, term lengths and speed of funding. Another strategy you can try, if time permits, is visiting your bank with some online quotes in hand to see if they can do better.
Remember that personal loan rates fluctuate (as does your credit score), so if you find an offer that’s competitive, don’t wait too long to apply. “Your best bet is to search online at the time you’re looking to start the loan and sign up for the best rate at a reputable institution at that time,” says Cole.
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Which Will Get You Better Rates on a Personal Loan – An Online Lender or a Bank? originally appeared on usnews.com
