How to Choose a Personal Loan Lender: Banks, Credit Unions, and Online Lenders

Overview of Lender Types

A personal loan is a type of installment loan, typically unsecured, offered by banks, credit unions, and online lenders. As of the end of 2022, the personal loan market in the United States reached $356 billion, about 10% of nonrevolving consumer credit. Depository institutions—including banks, thrifts, and credit unions—along with finance companies, dominate the market.

For borrowers, the choice of lender type can affect interest rates, fees, eligibility requirements, application speed, and customer service. This guide provides a framework for comparing the three primary types of personal loan lenders so you can decide which one may be a better fit for your situation.

• The three main lender types are traditional banks, credit unions, and online lenders (including fintech companies).
• Each type has its own strengths and trade-offs regarding cost, convenience, and accessibility.

Sources: Federal Reserve Board

Traditional banks: features

Traditional banks are depository institutions that have offered personal loans for decades. They typically provide in-person service at branches, which can be valuable for customers who prefer face-to-face interactions. However, banks often have stricter eligibility requirements and may take longer to process and fund a personal loan compared to online lenders.

Banks may offer lower interest rates to well-qualified applicants and sometimes provide perks to existing customers, such as relationship discounts. The application process usually involves more paperwork and a hard credit inquiry, though some banks offer preapproval options.

• In-person service and branch access may be available.
• Stricter underwriting standards can make approval harder for borrowers with lower credit scores.
• Processing times may be longer, from application to funding.
• Rates can be competitive for strong credit profiles.

Sources: Bankrate

Credit Unions: Benefits and Membership Requirements

Credit unions are member-owned financial cooperatives that typically aim to return profits to their members through lower rates and fewer fees. They often charge lower interest rates on personal loans than traditional banks, and they may be more flexible in their underwriting criteria for their members.

In the United States, federal credit unions are subject to an 18% interest rate ceiling for traditional personal loans, as set by the National Credit Union Administration. They may also offer payday alternative loans with rates up to 28%. Credit unions require membership, which is often based on your employer, geographic area, or affiliation with certain groups. Membership may involve opening a share (savings) account and meeting eligibility criteria.

Credit unions may have smaller branch and ATM networks than large banks, but many are part of shared branching or ATM networks that can extend access.

• Member-owned, not-for-profit structure often translates to lower rates and fewer fees.
• Require membership, which may involve eligibility based on employer, location, or group affiliation.
• Federal credit unions have a rate cap of 18% for traditional personal loans and up to 28% for payday alternative loans.
• May offer a more personalized approach to lending decisions.

Sources: Federal Reserve Board, Bankrate

Online Lenders: Convenience and Rates

Online lenders—including fintech companies—have grown significantly in the personal loan space. According to the Federal Reserve, fintech lenders, in partnership with banks, represented 35% of all personal loan offers in 2022. They often provide a fully digital application process, faster funding times, and easier qualification for some borrowers, especially those with good-to-strong credit.

Many online lenders allow you to prequalify with a soft credit inquiry, which does not affect your credit score, allowing you to see potential rates and terms before committing to a hard credit check. However, online lenders may charge higher maximum APRs and often charge origination fees, which can increase the overall cost of the loan.

Loan terms from online lenders often range from 12 to 84 months (1 to 7 years), depending on the lender. For example, SoFi offers terms from 24 to 84 months, while PenFed Credit Union—a credit union that operates primarily online—offers terms from 12 to 60 months.

• Fast, fully digital application process and often quicker funding.
• Prequalification with soft credit checks allows you to check rates without affecting credit score.
• May have higher maximum APRs and origination fees compared to banks or credit unions.
• Accessible to borrowers with a wider range of credit profiles, though terms and rates vary.

Sources: Federal Reserve Board, LendingTree, Bankrate

Comparing Customer Service and Support

Customer service and support can differ significantly among lender types. Traditional banks generally provide in-person branch service, which can be helpful if you prefer face-to-face discussions. Credit unions, as member-owned institutions, often emphasize personal relationships and may offer more individualized attention. Online lenders typically provide customer support through phone, email, or online chat, but you may not have access to a physical branch.

When comparing lenders, consider what level of support you expect. Ask about response times, availability, and how issues are handled.

• Traditional banks: in-person branch support.
• Credit unions: member-focused service, often with branch access.
• Online lenders: digital support (chat, phone, email) without branches.

Sources: Bankrate

How to Check Lender Reputation

Before choosing a personal loan lender, it's wise to assess its reputation. You can check customer reviews and complaints through the Consumer Financial Protection Bureau's complaint database, the Better Business Bureau, and state consumer protection agencies. Also, verify that the lender is licensed to operate in your state.

Use these general guidelines when researching any lender:

Ensure the lender is legitimate by checking for proper licensing and regulatory oversight.

Read customer reviews on independent platforms to gauge satisfaction.

Look for any red flags, such as unsolicited offers or requests for upfront fees.

• Verify lender licensing through your state's regulatory agency.
• Check the CFPB's complaint database for patterns of unresolved issues.
• Read independent customer reviews, but be aware of potential biases.
• Be cautious of lenders that guarantee approval or ask for fees before application.

Deciding Which Lender Type Fits You

Your choice of lender type should depend on your creditworthiness, how quickly you need funds, and your preference for in-person versus digital service. If you have strong credit and value face-to-face interactions, a traditional bank or credit union might be suitable. If you need fast approval and funding, an online lender may be more convenient, though costs could be higher.

Always compare offers from multiple lenders, because rates and terms vary based on your credit profile and other factors. Key factors to compare include loan amount, APR, repayment term, and any fees, such as origination fees.

Consider the following table to see a side-by-side comparison of the general characteristics of each lender type.

Sources: Experian

Evidence-Backed Comparison Matrix

Sources: Federal Reserve Board, Bankrate, LendingTree