The best place to get a personal loan may be your bank or credit union, but it also could be an alternative online lender or through a 0%-interest credit card.
You need to know your credit scores and research your options ahead of time to ensure you get the best rates and terms available. The place with the best rates for a good credit risk might not be the best for someone whose credit is only average.
Expect to pay much higher interest rates for a personal loan than for a mortgage or a car loan. Those are secured loans, backed by an asset the lender can seize if you don’t make your payments. Personal loans are unsecured by collateral, backed only by your signature and good name.
The better your financial track record, the wider your choices and the lower your rates.
Your credit determines your personal loan options
The best credit risks (FICO scores 720 to 850) are almost always better off with a 0% introductory rate credit card than a personal loan. But any lender would be happy to have you as a customer, making large loans available at its lowest rates.
Good credit risks (690 to 719) who don’t qualify for a no-interest credit card typically find that a personal loan offers a lower interest rate than a standard credit card can offer. You may not get the lender’s very best rates and you may not qualify for the largest loans, but you should be able to find a loan easily.
Average credit risks (630 to 689) can be good candidates for personal loans at reasonable rates, especially if they have substantial income, positive cash flow or a lengthy credit history. You’ll pay higher rates, and you may face a higher loan-origination fee. But your credit score may exclude you under some lenders’ underwriting guidelines.
Bad credit risks (300 to 629) are unlikely to qualify for a personal loan at favorable rates on their own. Several online lenders consider additional factors — such as a co-signer or earnings potential — in making their underwriting decisions. Bad-credit borrowers, if they qualify, will find rates at the upper ends of lenders’ ranges, sometimes as high as 36% APR. Origination fees may be steep, and the size of the loan may be restricted.
Unfortunately, the alternatives may be worse: High-interest installment loans, title loans and payday loans have effective interest rates of 300% or even higher. Almost any other choice — a loan from family, a part-time job — is preferable.
Some lenders have no minimum credit score to qualify for a personal loan, but that does not mean they do not look at your credit. The only difference is that a low credit score by itself is not a disqualifying event.
Where to look for a personal loan
Start with your local community bank or credit union. If you’ve been banking there for a while and the institution values you as a customer, you’ll get the best rate and loan amount. Credit unions typically offer lower rates because they are not-for-profit organizations. In either case, you probably will have to visit the bank or credit union in person to sign loan paperwork.
Compare their rates with those offered by online lenders, which conduct their business entirely online. Prime customers may see rates just as low or lower than those available from local banks or credit unions.
Online lending comes in a few different forms.
There are peer-to-peer lenders, such as Prosper, Upstart and Lending Club, which offer both competitive rates and generous loan amounts for prime customers. Your loan is funded by investors — often by several — whose return is determined by how much risk they are willing to accept. The lender handles the paperwork and dispenses the payments.
Other online lenders draw their funds from more traditional sources but still offer unique twists. They may offer perks like flexible payments, a break on making payments if you lose your job, or advice from financial counselors.
Most online lenders will quote you an interest rate and terms during a preliminary application process that does not involve a “hard pull” of your credit reports, which can damage your scores. (A soft pull is just an inquiry and doesn’t hurt your credit; a hard pull is an actual application for credit and is noted on your credit report.)
Funds from approved loans are delivered electronically to your bank account, usually within a day or two.
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