Why Banks May Not Be Your Best Option for Personal Loans
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Trying to assess your options for getting a personal loan? While traditional banks are probably the first option that comes to mind, there are many other avenues to getting a personal loan — some of which might be a better fit for you. By understanding the advantages and disadvantages of different types of lenders, you can make an informed decision about how to get the money you need.
Here’s how to compare loans from banks and other lenders.
Should you get a personal loan from a traditional bank?
A traditional bank is typically thought of as a lending institution that issues checking and savings accounts and has physical bank branches. You’re probably familiar with the names of some of the most popular traditional banks, such as Wells Fargo, Bank of America or Chase.
When shopping for a personal loan though, you need to consider your APR and the terms of the loan — not necessarily brand recognition. At a traditional bank, the APRs could be higher, especially if you don’t already do your banking with that institution. You might also have a hard time negotiating for terms that could help you in the future, such as flexible repayment plans.
In the competitive online lending space, however, lenders are always looking for new ways to bring in more clients and could be more willing to work with you to find terms that fit your needs. Comparing the benefits and drawbacks of a traditional bank can help you decide if it’s right for you or if you’d rather get a personal loan from an online lender.
- Large traditional banks have branches nationwide. Banks that have many locations could make it easier for you to ask questions in person or visit a branch to repay your loan.
- Could offer discounts if you already do your banking there. Some traditional banks will offer you better interest rates on a personal loan if you have a checking or savings account with them or have good credit.
- Enjoy a relationship with your banker. If you value meeting face-to-face with your banker instead of interacting online, then a traditional bank could be your best option, as you’d be able to visit the branch in your area and get to know your banker.
- Could take a long time to get approved. Sometimes traditional banks have a lengthy approval process for personal loans, which could be agonizing if you need money in a hurry.
- Might be challenging to get a loan with poor credit. Traditional banks are less likely to lend to risky borrowers, so if your credit isn’t great or you have no credit history, you might have difficulty getting approved.
- Some traditional banks don’t give unsecured loans. While many banks offer unsecured loans, there are a few, such as Chase and Bank of America, that don’t offer unsecured loans at all.
2 other types of lenders to consider
Traditional banks aren’t your only option if you’re trying to get a personal loan. Here are other types of lenders with a list of their pros and cons to help you decide which type of institution best fits your needs. Whether you’re trying to consolidate your debt or find money for a big purchase, there are alternative options to consider.
1. Credit unions
Credit unions are non-profit co-ops that offer banking services to their members.
- Generally more options for those with poor credit. If you have poor credit, or no credit, and need money now, credit unions could be the way to go. They are the only institutions able to give federally regulated Payday Alternative Loans, which are small dollar loans with repayment terms that are shorter than you may find on a traditional personal loan. Note that these aren’t payday loans, which can be a dangerous financial product due to the extremely high interest rates and fees they come with.
- Focused on customer needs. Credit unions are nonprofit organizations, so their entire mission is to support members. Because of this, some people notice a higher level of customer service and flexibility at credit unions.
- Community mindset could cater to your specific needs. Credit unions are tailored to specific communities. Sometimes these communities are based on geography, while other times they could be centered around a specific employer. Because of this, they can sometimes offer products that meet the needs of your specific situation.
- Fewer locations could make visiting a branch frustrating. A credit union won’t have as many brick-and-mortar locations as a traditional bank, so if you’re traveling or moving in the future, it could becoming frustrating to visit your branch.
- You need to be a member. Each credit union has its own membership requirements. Some have a membership fee while others require that you living in a certain area or work for a specific employer. On top of that, some credit unions stipulate that you need to do your banking with them or have been a member for a certain length of time before you can access their loan products.
- Might not have a strong web experience. If you enjoy doing your banking from your own home, you might not notice as many features on a credit union’s web platform as a company that is specifically devoted to online loans.
2. Online banks
The competitive online lending industry has built an environment where borrowers can shop around to compare rates and terms before finding an offer that best suits them.
- Compare rates online before committing to a loan. Most online lenders can do a soft credit pull, which is when they check your credit as part of a background check instead of as a request for more credit. This enables you to compare quoted rates from multiple lenders and could help you find a better deal.
- Do your banking at home. With online lenders, you never have to leave the house or even change out of your pajamas to receive your loan and make payments. It’s a convenient process that you can fit into your busy schedule.
- Get money quickly. Online lenders are known for quick processing time since they have less red-tape to cut through before they can get you approved for a loan.
- You’re processing personal information online. If you’re someone who feels uncomfortable sharing personal information over the internet, then it might be hard for you to fill out all the online forms you’ll need to in order to receive online funds.
- You won’t see someone in person. Since the entire process of receiving your loan and repaying it is done through the computer, you won’t be able to talk to someone face-to-face if you have concerns.
- No benefits for established banking relationships. While traditional banks might offer a discount in interest rates if you’re in good standing with them, you might not get the same deal from an online lender.