Private Lenders Or Banks?| Bankrate

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When evaluating personal loan lenders, you can choose from traditional banks and private online lenders. Bank lenders typically offer better rates and the added security of working with a well-established lender, but loans from private online lenders are often quicker and easier to get.

The option that will work best for you depends on your specific circumstances. If you don’t have a lot of credit history or your credit is poor, it may be easier for you to get a loan from a private lender. If you have a good credit score or an established relationship with the bank you want to borrow from, you will likely qualify for better lending terms from a bank. To determine which option will work best for your situation, you should consider your credit health, the interest rate you can afford, as well as additional features that might benefit you, such as online versus in-person service.

Statistics

  • Average APRs for online personal loan lenders range from 5.99 percent to 35.99 percent.
  • The average APR for a personal loan from a bank is 8.73 percent.
  • 56.2 percent of Americans with personal loans borrowed money from a bank in 2021.
  • 32.2 percent of Americans with personal loans borrowed from online lenders in 2021.
  • 78 percent of Americans prefer digital banking to in-person banking.
  • Borrowers can save an average of 35 percent by shopping around before choosing a loan.

Comparing banks vs. online lenders

 

Getting a Loan: Bank vs. Lenders 

Bank  Online Lender 
Lower interest rates Higher interest rates
Slower application process Faster application process
Rigorous approval process Easier approval process
More regulated Less regulated

While both bank and online loans are subject to government and industry regulation and involve varying rates and terms, there are many differences between the two.

Bank loans tend to be much more highly regulated, meaning that the eligibility and borrowing requirements are less lenient. They also take longer and often require in-person visits to finalize the loan. Since the process of getting a bank loan is more rigorous, banks are typically able to offer lower interest rates and sometimes offer perks for pre-existing customers.

Online lenders are much less regulated than banks, allowing faster application processes and more lenient eligibility requirements. However, because online lenders review applicants less rigorously, they also tend to have higher interest rates and fees than traditional lenders. The primary advantage of an online loan is convenience, as you can complete the entire process online and funding is typically available within the week, whereas banks tend to take longer.

Deciding which is right for you

Before choosing which type of lender is right for you, there is a lot to consider. It is always best to shop around and compare rates from multiple lenders before settling on one. You will need to consider the rates, loan terms, requirements, closing costs and fees various lenders offer. You also need to make sure you know your credit score and are confident about what you can afford before applying.

Are banks better for me?

Getting a personal loan from a bank may be the best move for you if you have a pre-existing relationship with a bank, you have good to excellent credit and you have time to go through the longer approval process.

The benefits of taking out a personal loan from a bank are a lower interest rate, potential offers and perks for existing customers, in-person customer service and the consistency and security traditional banks offer. While online lenders have the option to sell your loan to another servicer, banks tend to see loans through to the end. However, there are also drawbacks.

While many banks offer quick funding comparable to online lenders, bank loans typically take longer to process, and you may have to visit a branch in person to apply. If you need money ASAP and do not have time to wait, it may be best to look at online lenders.

In addition, many bank lenders do not allow you to prequalify before applying for a loan, making it more difficult to predict exactly what your monthly payments will be before applying. Banks also have stricter eligibility requirements since they are more regulated, meaning that borrowers with bad credit or little credit history may have difficulty qualifying.

One of the biggest advantages of working with a bank is the perks of having a pre-existing relationship with the bank. However, this can also mean that there will be pressure to sign up for additional financial services. If you decide to take out a loan from a bank, make sure that you only apply for what you need.

Pros  Cons 
Higher chance of lower interest rates No pre-qualifying
Could offer special rates to existing customers Pressure to sign up for other financial services
Continue servicing your loan Stricter eligibility criteria

Are online lenders better for me?

Getting a personal loan from an online lender may be better for you if you are worried about being able to qualify, if you need the money quickly or if you prefer the convenience of a fully online experience.

An online loan could also be beneficial if you want to learn lending and financial skills, as many online lenders have online resource centers with various calculators, informative videos and other financial literacy tools. One of the biggest benefits of online lenders is that they typically allow you to prequalify. This process allows you to see what you may be eligible for if you applied, based on a soft credit pull that does not impact your credit. For new borrowers, prequalifying could give you a better understanding of your financial situation and your ability to borrow.

Online lenders also come with risks. Since they typically have less strict eligibility requirements, online loans typically have higher interest rates than bank loans. This is especially risky for bad credit borrowers, who may be more likely to look online due to the easier eligibility requirements. You should never take out a loan unless you are sure you can make the monthly payments, including interest.

Online loans also come with a greater risk of scams. Since online lenders are less regulated and the internet is relatively new compared to brick-and-mortar banks, it is important to make sure you choose from verified lenders. To avoid personal loan scams, compare top lenders and read customer reviews before choosing a lender.

Loans from online lenders tend to be popular among borrowers with bad credit since the requirements are less strict and there is some potential to negotiate loan terms. Consider looking at bad credit loans if you don’t have good credit. These lenders are open to working with bad credit borrowers and have reasonable rate caps to help borrowers avoid sky high interest. However, the rates on these loans can still be relatively high, and you should always make sure you can afford payments before signing a loan agreement.

Pros  Cons 
Easier to compare lenders and rates side by side No in-person customer service
Financial literacy and lending resources Higher interest rates
Potential to negotiate loan terms Risk of scams

Other financial institution opportunities

While banks and online lenders are two of the most popular personal loan servicers, other options exist. You can also take out a personal loan from a credit union, peer to peer lender or a point of sale installment loan from a store if you need the loan for a certain item.

  • Credit unions: A credit union is a member-owned financial institution. You typically need to be a credit union member to access its services. They often offer lower interest rates and fees than banks, and the application process is a bit easier once you are a member. To join a credit union, you typically need the same documents to open a banking account, including a government-issued ID, proof of address, etc.
  • Peer-to-peer (P2P) loans: Peer-to-peer loans are loans that an individual or company issues. Peer-to-peer lending platforms allow you to submit a single application and be matched with lenders that might work for you. This is a good option if you are having trouble qualifying elsewhere or if you want the ease of submitting one application and having lenders come to you.
  • Point-of-sale installment loan: Point-of-sale installment loans are loans issued by a retailer that allow customers to buy an item immediately and pay it off in installments. This option may come with a discount or interest-free period, which could be a solid option if you plan to take out a loan to purchase the item. However, interest rates can be high, and taking out this kind of loan is generally not advisable.

Reminder

While shopping around for loans, it is important to know how much your total cost will be by the end of the repayment period. Bankrate offers resources to help you learn how to calculate the interest on your loan so that you are prepared to begin making payments.

The bottom line

You have various options if you are in the market for a personal loan. Deciding what type of lender you want to work with is the first step toward finding the right lender for you. Online lenders and peer-to-peer lenders offer an alternative if you need money quickly or are worried you may not qualify with a bank. If you prefer in-person service and are currently working with a bank you trust, it could be a good idea to borrow from them. However, before considering a personal loan, it is worth trying to save money or find an additional income stream. While personal loans are often necessary., it is best to avoid taking on debt if you can.



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