This is not a time to borrow casually. Many economists are forecasting an economic slowdown or even a recession, and some are expecting a spike in inflation, which could lead to higher interest rates. So, anyone looking for a personal loan should make sure they’re pursuing their best option.
[Read: Best Low-Interest Personal Loans]
Where Can I Get a Personal Loan?
Personal loans are installment loans. You borrow a lump sum and repay it, with interest, over an agreed period. The most common forms of these loans have fixed interest rates and are unsecured, meaning they do not require collateral.
Most banks and credit unions offer personal loans. These are great options if you’re already an established customer or member, or you just prefer to borrow from a traditional financial institution.
However, many of the lowest advertised interest rates come from online lenders. These lenders often have less overhead since they do not operate branch networks, helping them offer lower rates.
Online lenders may also move more quickly than banks, with many offering same-day decisions and funding.
However, one downside with online lenders is that many are newer businesses without established reputations. So how do you know which ones are trustworthy?
The first step is to check consumer reviews on platforms like Trustpilot and the Better Business Bureau. The BBB will also provide information on any recent regulatory action taken against the lender.
“Don’t make the mistake of just shopping for the lowest rate,” says Christopher M. Naghibi, executive vice president and chief operating officer of First Foundation Bank. “Shop for a lender you can trust. Compare actual offers, not just flashy ads, and take your time. If something feels off, listen to your gut. It’s better to walk away than to get stuck in a bad loan you’ll regret for years.”
[Related:How to Get a Small Personal Loan]
What to Look for When Shopping for a Personal Loan
The first thing to check when borrowing is the loan’s annual percentage rate. The APR represents the total cost of borrowing, including the interest rate and lender fees. But you might not be offered the lowest interest rates and APRs that lenders advertise.
“Advertised rates are mostly marketing,” says Naghibi. “The rates you see are showing you the best-case scenario for people with near-perfect credit scores, low debt, and high incomes.”
Lenders and loan marketplaces also may publish the range of interest rates or APRs you can expect for a given loan type, depending on your financial situation. A borrower whose credit score is good, but not excellent, might be offered a rate in the middle of the range, while someone with bad credit might get one at the top of the range.
Another thing to watch out for: If you want to repay the personal loan early, make sure there are no prepayment penalties. These may not be a dealbreaker if they are small, but big ones can leave you feeling trapped for the entire loan term.
Red Flags to Avoid
Scammers and predatory lenders tend to use similar tactics in all environments, including the personal loan market. The best place to get a personal loan will not use dubious sales techniques.
“Just like phishing emails we all get or dealing with a high-pressure salesperson, spotting a predatory lender is similar,” says William Gogolak, Ph.D., an assistant teaching professor at Carnegie Mellon University. He explains that “a predatory lender, like a shady car salesperson, often lures you in with offers that seem too good to be true — low monthly payments or an enticingly low advertised interest rate, only to hide the true costs in the fine print.”
Borrowers facing such sales techniques, says Gogolak, should resist them. “In all cases, the trick is to slow down, do your homework, and read the fine print. Whether it’s loan terms, car conditions, or email links, don’t let pressure tactics sway you into a decision without fully understanding what you’re agreeing to.”
It’s important to ask the lender questions and gauge whether they’re giving you an honest, straightforward response, or answering with misleading information, Naghibi says.
“If a lender is charging a crazy high origination fee (like anything north of 5%), pressuring you to make a fast decision, dodging your questions about the real APR, or offering a loan without pulling your credit — that’s a lender you need to walk away from,” Naghibi says.
[READ How to Get a Personal Loan With a Cosigner]
Pros and Cons of Different Personal Loan Lenders
There’s no right or wrong answer when choosing between traditional and online lenders. Here are some of the pros and cons of each.
Banks and Credit Unions
Pros
— Most banks and credit unions are established entities with reputations to protect and customer relationships to build. And credit unions are owned by their members.
— A bank you already deal with may offer you better terms than it would a new customer.
— In-person service is available for those who prefer it.
Cons
— A branch network generally requires more overhead, which could mean higher APRs.
— Even lenders with strong reputations may not give you the best deal.
— The application and funding process may take longer than online lenders
Online Lenders
Pros
— APRs may be lower than those offered by brick-and-mortar banks and credit unions.
— The application and funding process tends to move quicker.
— An online-only process can be convenient for many borrowers.
Cons
— Borrowing online may expose you to scammers and predatory lenders.
— You may need to spend more time researching lenders if you’re not familiar with the options.
— In-person service may not be an option.
[CALCULATE: Your Monthly Personal Loan Payment.]
Your Best Place to Get a Personal Loan
Choosing the best place to get a personal loan hinges on your priorities.
If you prefer familiarity, going with your existing bank or credit union may be best, even if you pay a little more for your loan. And you may very well get the lowest possible rate this way anyway.
However, if convenience is more important, online lenders may suit you better. Plus they tend to advertise the lowest rates.
Naghibi recommends trusting your gut instinct. “Reviews online are helpful. Focus on businesses that treat you like a relationship and not a transaction. You will know the difference.”
More from U.S. News
What Is a Good APR on a Personal Loan?
How to Get a Personal Loan With a Cosigner
How Many Personal Loans Can You Have at Once?
What’s the Best Place to Get a Personal Loan? originally appeared on usnews.com
