Private lenders vs. banks: Which is better?
Key takeaways
- Both banks and private lenders offer personal loans with rates and terms that rely on your credit and finances.
- Banks are a solid pick for established borrowers with a positive credit history. Perks often include lower rates and more customer service options.
- Private lenders are a great choice for borrowers who need funds fast or don’t have the best credit scores. This may be an option to explore if you need more lenient approval standards.
- Whether you choose a private lender or a bank, remember that there may be more affordable alternatives to personal loans. Depending on your credit score, personal loan interest rates can be high.
When choosing a personal loan lender, you can find reputable options from both traditional banks and online lenders. Banks typically offer better rates and the added security of working with a well-established lender, but online lenders often provide fast funding and can make it easier to qualify.
The best option for you depends on your finances, credit score and funding needs. The best personal loan rates will be reserved for borrowers with excellent credit, though you can find options no matter your credit score. You should also consider additional features like minimal fees and in-person service when comparing banks versus online lenders.
Comparing banks vs. online lenders
| Banks | Online lenders |
| Lower interest rates | Higher interest rates |
| Slower application process | Faster application process |
| Rigorous approval process | Easier approval process |
| More regulated | Less regulated |
Bank loans tend to be more highly regulated, meaning eligibility criteria are less lenient than with online lenders. They also tend to take longer and often require in-person visits to finalize the loan. Since getting a bank loan is often more rigorous, banks can typically offer lower interest rates and provide perks for existing customers.
Online lenders are less regulated than banks, allowing for a faster application process and more lenient eligibility requirements. However, online lenders tend to have higher average interest rates and more fees. The primary advantage of an online lender is its convenience. You can complete the entire process online, and funding is typically available within a few business days.
How to decide which lender is right for you
Before determining which type of lender is right for you, there are many factors to consider. Shop around and compare rates from multiple lenders first. You’ll need to consider the rates, loan terms, requirements and fees. It’s also important to check your credit score and understand your budget before applying.
Banks: Pros and cons
Getting a personal loan from a bank may be the best move for you if you have an existing relationship with one, have good to excellent credit and have time for a longer application process.
Banks may offer lower interest rates on their personal loans as well as other perks for existing customers. They also frequently have in-person customer service and are more highly regulated than online lenders.
Pros
- Lower interest rates: The maximum rates charged by banks are typically lower than those imposed by online lenders. Since eligibility metrics are more stringent, the risk to the lender is reduced, allowing them to offer lower rates.
- Potential rate discounts: In addition to industry-standard discounts like enrolling in autopay, existing bank customers may qualify for a relationship discount.
- In-person service available: Banks offer flexibility for customer service. Most banks have physical branches where you can speak to a loan officer, in addition to digital banking options.
Cons
- May not offer prequalification: Some banks don’t allow you to prequalify for a loan, making it more difficult to compare rates and terms. Some big-name national banks don’t offer personal loans at all.
- More strict requirements: Banks also tend to have stricter eligibility requirements. Borrowers with bad credit or limited credit history may have difficulty qualifying with a bank.
- Longer processing time: Banks typically take longer to process personal loan applications, and you may have to visit a branch to apply.
Online lenders: Pros and cons
Getting a personal loan from an online lender may be better if you’re worried about being able to qualify, need money quickly or prefer the convenience of a fully online application.
For new borrowers, prequalifying could provide a better understanding of your financial situation and your ability to borrow. That said, many banks also offer the ability to prequalify, so you can compare your rates with both and choose the best offer.
Pros
- Prequalification available: One of the biggest benefits of online lenders is that they typically allow you to prequalify. This process allows you to see what rates you may be eligible for based on a soft credit pull that does not impact your credit.
- Easier to qualify: Some online lenders have less strict requirements than banks, especially if you need a bad credit personal loan. Rates may be higher, but they can be helpful if you need the funds and can afford to make payments.
- Educational resources: An online lender may have information on financial skills alongside various calculators, informative videos and other financial literacy tools.
Cons
- No in-person customer service: To keep operating costs low, online lenders don’t have in-person branches. Instead, you’ll need to call or email if you need help with your loan.
- Higher interest rates: Online lenders typically have less strict eligibility requirements, so you may face higher interest rates, potentially as high as 36 percent.
- Potential scams: Because online lenders tend to be less regulated, make sure you choose a legitimate lender. To avoid personal loan scams, compare top lenders and read customer reviews before choosing a lender.
Other types of personal loan lenders
While banks and online lenders are two of the most popular personal loan providers, there are other options — including alternatives to personal loans.
Credit unions
A credit union is a member-owned financial institution. You must be a member to qualify for a personal loan, which may require living in a certain area or working in a specific field. To join a credit union, open an account and provide a government-issued ID, among other information.
Credit union personal loans offer lower interest rates and fewer fees than banks, and the application process is easier once you’re a member. The National Credit Union Administration also caps interest rates at 18 percent for federal credit unions — that’s half the cost of loans with some lenders.
Peer-to-peer (P2P) loans
Peer-to-peer loans are issued by an individual investor, not a lender. P2P lending platforms allow you to submit a single application and match with investors 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.
Buy now, pay later loans
If you’re borrowing to make a large purchase, a buy now, pay later (BNPL) app may be a good fit. BNPL apps allow you to split your purchase into four equal installments, with the first quarter due upfront. If you make the payments on time as promised, BNPL loans are typically interest-free.
However, BNPL apps won’t be useful if you need to cover an emergency expense or bill. Because they’re so limited — and depend largely on where you shop — they’re only useful for shopping.
Bottom line
Some borrowers may find that their needs are best met by a bank’s competitive rates and customer service, while the speed and ease of an online lender better serves others.
Be sure to compare rates from both options to find the best loan, and consider the alternatives before borrowing a personal loan. Use a personal loan calculator to understand the cost of borrowing and ensure that a loan fits your budget.
