Personal loans saw record-growth in the last quarter of 2022, with 22 million consumers holding one as part of their portfolio. Although numbers have cooled off since then, demand for personal loans is still high.

If you’re considering a personal loan, there are three main types of lenders to look to: banks, credit unions and online lenders. The best choice for you is whichever one gives you the better deal — and where you prefer to manage your money.

Key takeaways

  • Prequalification with multiple lenders is key to securing a low rate.
  • Banks offer lower rates on average but are more difficult to qualify for.
  • Online lenders have quick applications but may charge more fees.
  • Calculate total cost to determine which lender is the best option.

Online lenders

These digital lending platforms streamline the borrowing process, allowing you to compare personal loan rates and terms, apply online and receive an answer usually within the same day. It is also possible to receive your loan  within a few hours of approval, although most online lenders take one to two business days.

Many online lenders offer prequalification as well. They provide custom rates and terms for you after running a “soft” credit check, which doesn’t impact your credit. However, the lender will perform a “hard” credit check when you finalize the loan, which temporarily lowers your credit score by a few points.

Some online lenders are also willing to work with people with lower credit scores. In addition to reviewing your credit history and income, they may also consider factors like your job and education when making a decision.

Pros

  • Streamlined application process. With an online lender, you can apply for a loan in as little as ten minutes from practically anywhere.
  • Quick process. Since online lenders operate digitally, many are able to process and fund your application in a matter of days.
  • Flexible requirements. Although some online lenders cater to consumers with good to excellent credit, many offer their products to those with lower credit scores.

Cons

  • Interest rates may be higher. Some online lenders have higher maximum rates than traditional lenders. The lower your credit score, the greater your chances of receiving an interest rate greater than 30 percent.
  • No physical branches. If you prefer to speak to a loan officer in person, you’ll have to consider an alternative option — for example, a bank or credit union that has a physical branch in your area.

Best for

  • Tech-savvy borrowers who are comfortable applying for a loan without a live banker.
  • Borrowers looking for fast funding.

Banks

Although online lenders are now leading the personal loan space, brick-and-mortar banks are still lending tens of billions of dollars annually. Banks typically offer higher loan amounts than online lenders — but they also have more stringent requirements.

Some banks offer relationship discounts if you have another account with them. For example, some banks shave 0.25 percent off your personal loan APR if you already have a qualifying checking or savings account with the bank. If you like your bank or have been a long time customer, ask about this type of discount.

Even if you’ve been banking with an institution for many years, it will still check your credit. The bank will perform a hard credit check and review your personal information before lending to you. However, many banks are following the lead of online lenders and offer prequalification so you can check your rates without impacting your credit.

Pros

  • Higher loan amounts. Traditional banks generally offer higher maximum loan amounts than other lenders, which may come in handy if you need to finance a large expense.
  • Offers more financial products. Traditional banks typically have a wider variety of financial products than credit unions and online lenders. As a result, it can be a better option if you prefer a one-stop shop.

Cons

  • More strict borrowing requirements. Traditional banks often have more strict borrowing requirements than online lenders and banks. You may need a strong credit score to be approved.
  • May have to apply in person. Some traditional banks require you to apply in person – which can be an inconvenience if you prefer not to drive to your local branch.

Best for

  • Borrowers with good credit.
  • People with an established checking or savings account at a specific bank.

Credit unions

Instead of answering to shareholders, credit unions must act in the best interest of their members — people who have an account. Credit unions require membership to qualify for a personal loan, but this may be an easy hurdle to clear. For example, some credit unions just require you to make a small donation to a charity or live or work within a certain area.

Because credit unions are nonprofit institutions, their mission may influence lending decisions, which is why it may be easier to qualify for a loan with them than with a traditional bank. This is especially true if you have average credit and already have a relationship with the credit union you’re trying to get the loan from.

Credit unions tend to offer smaller personal loans than banks and online lenders, but their interest rates may be lower. The average interest rate on a three-year personal loan from a credit union is 10.02 percent, according to March 2023 data from the National Credit Union Administration (NCUA).

The maximum interest rate federal credit unions are allowed to charge for loans is determined by the NCUA and is currently set at 18 percent.

Pros

  • Less-strict eligibility requirements. Credit unions often have less-stringent credit requirements than some traditional banks — which means they may be willing to approve you for a loan with less-than-perfect credit.
  • May offer lower rates. Since credit unions are not-for-profit, member-owned organizations, they might offer personal loans with lower interest rates than some traditional banks and online lenders.

Cons

  • Membership required. To qualify, you must become a membership of the credit union you’re applying with. Though membership requirements vary, some credit unions only require you to open a savings account and deposit a minimum amount or join an organization.
  • Smaller loan amounts. Loan amounts are generally smaller compared to traditional banks due to the increased credit risk that credit unions absorb.

Best for

  • Members of the credit union who have average credit and don’t need a large loan.
  • People with average credit who are looking for a more community-oriented lending experience.

Bottom line

Consider getting prequalified with at least three lenders. If you have a relationship with a financial institution that you enjoy working with, see if it can provide a competitive personal loan offer.

Before deciding if an online lender, bank or credit union is best, use a personal loan calculator to get an estimate of your monthly payment and overall loan costs. Once you have an idea of how big of a loan you can afford, research lenders to find the best fit.