Demand for personal loans has been growing steadily over the past 12 months and is expected to reach or surpass pre-pandemic levels this year with almost 20 million new loan originations. Borrowers seeking to consolidate growing credit card debt are increasingly turning to personal loans as a solution.

If you’re considering a personal loan there are three main types of lenders to look to: banks, credit unions and online-only lenders. But while many types of lenders can provide personal loans, there is no one best option. The best choice for you will depend on where you prefer to manage your money and the loan’s terms, fees and interest rates. Before you apply for a personal loan, look for the best offers across each type of lender.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

Where to get a personal loan

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’s also possible to receive the loan proceeds into your account in as little as one to two business days.

A feature that sets online lenders apart is that most use a prequalification process. Online lenders can provide custom rates and terms for you after running a “soft” credit check, which won’t impact your credit. However, the lender will perform a “hard” credit check when you finalize the loan, which usually temporarily lowers your credit scores 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 other factors, such as your job and education, when making a lending decision.

There are many online lender options to choose from. For example, you may decide to work with a peer-to-peer lender online. These loans are funded by investors instead of a traditional bank.

Pros

  • More seamless application process. With an online lender, you can apply for a loan in as little as ten minutes from practically anywhere.
  • Fewer fees. Since online lenders don’t have to pay for physical branches, they may be able to pass those cost savings on to you in the form of fewer fees.

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, if you qualify.
  • 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.

Banks

Although online lenders are now playing a bigger role in personal loan lending, brick-and-mortar banks are still lending tens of billions of dollars annually. Banks typically offer higher loan amounts but require borrowers to have higher credit scores.

Some banks offer relationship discounts if you have an existing relationship with them. For example, some banks shave 0.25 percent off your personal loan APR if you already have a qualifying account with the bank. That can help you save money over the life of the loan. 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’ll still check your credit. The bank will perform a hard credit check and review your personal information before lending to you.

Pros

  • Higher loan amounts. Traditional banks generally offer higher maximum loan amunts than other lenders, which may come in handy if you need to borrow a large amount.
  • 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.

Credit unions

Instead of answering to shareholders, credit unions must act in the best interest of their members, who are customers like you. 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 within a certain area.

Borrowers with average credit might have more success getting a personal loan with a credit union, especially a credit union with which the borrower already has a working relationship.

Because credit unions are nonprofit institutions, their mission may influence lending decisions. For example, Navy Federal Credit Union, which serves members of the U.S. armed forces and the National Guard, may offer loans to borrowers who wouldn’t be approved elsewhere.

Credit unions tend to offer smaller personal loans than banks and online lenders, and their interest rates may be lower. The average interest rate on a three-year personal loan from a credit union is 8.84 percent, compared to 9.93 percent at a bank, according to June 2022 data from the National Credit Union Administration.

The maximum interest rate federal credit unions are allowed to charge for loans is determined by the National Credit Union Administration and is currently set at 18 percent. However, the maximum interest rate for short-term loans rises to 28 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 if you have a positive working relationship.
  • 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 may 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

How to choose the best lender for you

The amount of money you need to borrow, the terms you’re looking for and your financial history all contribute to determining the best personal loan for you.

Here are steps you can take to figure out which type of lender is best for you:

  1. Shop around with lenders to find those who offer the type of personal loan you need.
  2. Compare loan offers for the same amount and terms from different lenders.
  3. Research to determine if the lender charges loan application, origination or early repayment fees.
  4. Check eligibility requirements for each loan.
  5. Determine whether you qualify for membership at a local credit union.
  6. Check your credit reports and credit scores.
  7. Figure out how much you need to borrow.
  8. Calculate the monthly payments to ensure they’re affordable.

Once you’ve found the personal loan that fits your needs, research that particular lender’s reputation. Look through online reviews, the Better Business Bureau and the Consumer Financial Protection Bureau.

It’s equally important to consider the lender’s hours of operation and contact methods to determine if they’re easily accessible. If you’d prefer to visit a physical location for assistance with your loan application or servicing once the funds are disbursed, an online lender isn’t an ideal option. But if you’re ok with an online lender that can be contacted by telephone, chat or email, they could be suitable.

You can also compare personal loans on Bankrate and get prequalified without hurting your credit score.

Bottom line

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.

Consider getting pre-qualified with at least three lenders. If you have a relationship with a financial institution that you enjoy working with, it makes sense to see whether it can provide a competitive personal loan offer. Also, be sure to compare interest rates and fees and evaluate customer service reviews to ensure you select a lender that best suits your needs.