May 6, 2016 in Personal Loans

What lenders look for in a personal loan borrower

Whether you apply for a personal loan at a bank, credit union or a financial-technology firm, there’s much about the process that’s similar from one lender to another.

You’ll be asked to provide proof of income. You’ll have to demonstrate an ability to repay your loan. You’ll be asked what you plan to use the money for — and you’ll be forbidden from using it to fund certain activities.

The online lender Prosper Marketplace, for example, won’t lend you money to buy or trade securities, pay for college expenses, gamble or engage in illegal activities, spokesman Sarah Cain says. Other lenders, like the online lender SoFi, specialize in refinancing student loan debt with a personal loan.

Of course, all lenders, no matter their type, set different interest rates, fees and loan terms. As with other loan products, consumers with the highest credit scores will receive the best personal loan offers.

Because banks lend to consumers deemed less risky, they’re more willing to issue bigger loans.

But lending data suggests there are some universal differences among banks, credit unions and finance companies that could determine the type of lender best suited for you.

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A review by the credit bureau TransUnion of 54 million unsecured personal loans issued between 2010 and 2014 found 2 big differences among lenders:

“We generally lend to customers with a very strong credit profile,” says Stephanie Cutler, vice president of product management, personal lines and loans at Wells Fargo. Personal loan borrowers also must have an existing relationship with the San Francisco-based bank. That could be in the form of a deposit account or other Wells Fargo banking product.

Higher credit score needed at banks

While Wells Fargo doesn’t cite a minimum credit score for personal loan borrowers, some banks do. TD Bank, headquartered in Cherry Hill, New Jersey, says it will issue personal loans only to borrowers with a credit score of 680 or above. That’s considered a prime credit score, but it’s a bit lower than the average U.S. FICO score, which stood at 695 as of April 2015.

The TransUnion study found banks were least likely to lend to customers with weak credit. Just 35% of their personal loan customers had credit scores considered below prime — that’s typically between 300 and 660.

Credit unions, meanwhile, issued 53% of their personal loans to non-prime customers, while finance companies made 77% of their loans to customers with low credit scores.

“We’re focused on this middle-income segment that banks by and large aren’t getting,” says Al Goldstein, CEO of the Chicago-based marketplace lender Avant. The average credit score of an Avant borrower is 655, Goldstein says.

A number of marketplace lenders cater to below-prime customers. San Francisco-based LendUp, for instance, will issue loans to borrowers with a credit score as low as 450.

Loan values differ

The TransUnion study found that because banks lend to consumers deemed less risky, they’re more willing to issue bigger loans. The average bank loan was $6,050, while credit unions and finance companies lent significantly smaller sums.

The average credit union loan was $3,502, while the average finance company loan was for $2,179.

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