Online Lenders Vs. Banks: Which Is Better?

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When choosing a personal loan lender, you can find reputable options from traditional lenders — banks and credit unions — as well as online lenders. Banks and credit unions may offer the best personal loan rates and the added security of working with a well-established lender, but online lenders often provide fast funding and can make it easier to qualify.

The best option for you depends on your finances, credit score and funding needs. You should also consider additional features like minimal fees and in-person service when comparing credit unions and banks versus online lenders.

Comparing banks and credit unions vs. online lenders

Credit union and bank loans typically have stricter eligibility criteria than online lenders. They also tend to take longer and often require in-person visits to finalize the loan. Since getting a credit union or bank loan is often more rigorous, these institutions can typically offer lower interest rates and provide perks for existing customers.

Online lenders are more likely to sell your debt to another servicer (or a debt collector, if you default), so they often have a faster application process and more lenient eligibility requirements. They may also offer great starting rates since they don’t have as much overhead as a brick-and-mortar lender. However, online lenders tend to have higher maximum and average personal loan interest rates and more fees. The primary advantage of an online lender is its convenience. You can complete the entire process online, and funding is typically available within a few business days.

How to decide which lender is right for you

Rather than only considering one type or another, shop around and compare offers from multiple lenders first. You’ll need to consider the rates, loan terms, qualification requirements and fees. It’s also important to check your credit score and understand your budget before applying.

Banks: Pros and cons

A bank may be the best option for you if you have an existing relationship with one, have good to excellent credit and have time for a longer personal loan application process.

Banks may offer lower interest rates on their personal loans as well as other perks for existing customers. They also frequently have in-person customer service and are more highly regulated than online lenders.

Pros

• Lower interest rates: The maximum rates charged by banks are typically lower than those imposed by online lenders. Since eligibility metrics are more stringent, the risk to the lender is reduced, allowing them to offer lower rates.
• Potential rate discounts: In addition to industry-standard discounts like enrolling in autopay, existing bank customers may qualify for a relationship discount.
• In-person service available: Banks offer flexibility for customer service. Most banks have physical branches where you can speak to a loan officer, in addition to digital banking options.

Cons

• May not offer prequalification: Some banks don’t allow you to prequalify for a loan, making it more difficult to compare rates and terms. Some big-name national banks don’t offer personal loans at all.
• Stricter requirements: Banks also tend to have stricter eligibility requirements. Borrowers with bad credit or limited credit history may have difficulty qualifying with a bank.
• Longer processing time: Banks typically take longer to process personal loan applications, and you may have to visit a branch to apply.

Credit unions: Pros and cons

A credit union shares many of the same pros and cons as a bank, but the two institutions have some differences that you’ll need to consider before choosing which option fits best with your needs. 

Pros

• Even lower interest rates: Credit union personal loans typically offer lower interest rates and fewer fees than banks, and the application process is easier once you’re a member.
• Interest caps: The National Credit Union Administration also caps interest rates at 18 percent for federal credit unions — that’s half the cost of loans with some lenders.
• Member focused: Credit unions are often member-owned, not-for-profit institutions within the community, instead of big corporations. As such, they typically have more personalized customer service and a member focus, with representatives that will likely remain more consistent.

Cons

• Must be a member: A credit union is a member-owned financial institution, so you must be a member to qualify for a personal loan. This may require living in a certain area or working in a specific field. To join a credit union, open an account and provide a government-issued ID, among other information.
• Limited branches: As a smaller, member-owned institution, there are likely fewer branches available outside the community. If you live or work farther away, it can be inconvenient to do business with a credit union.
• Fewer digital banking tools: Some credit unions may not be as technologically advanced as some corporate banks with large teams dedicated to tech. For example, the credit union may not have a mobile app, or it may not be compatible with other finance apps. 

Online lenders: Pros and cons

Getting a personal loan from an online lender may be better if you’re worried about being able to qualify, need money quickly or prefer the convenience of a fully online application.

For new borrowers, prequalifying could provide a better understanding of your financial situation and your ability to borrow. That said, many banks also offer the ability to prequalify, so you can compare your rates with both and choose the best offer.

Pros

• Prequalification available: One of the biggest benefits of online lenders is that they typically allow you to prequalify. This process allows you to see what rates you may be eligible for based on a soft credit pull that does not impact your credit.
• Easier to qualify: Some online lenders have less strict requirements than banks, especially if you need a bad credit personal loan. Rates may be higher, but they can be helpful if you need the funds and can afford to make payments.
• Educational resources: An online lender may have information on financial skills alongside various calculators, informative videos and other financial literacy tools.

Cons

• No in-person customer service: To keep operating costs low, online lenders don’t have in-person branches. Instead, you’ll need to call or email if you need help with your loan.
• Higher interest rates: Online lenders typically have less strict eligibility requirements, so you may face higher interest rates, potentially as high as 36 percent.
• Potential scams: Because online lenders tend to be less regulated, make sure you choose a legitimate lender. To avoid personal loan scams, compare top lenders and read customer reviews before choosing a lender.

Bottom line

Banks, credit unions and online lenders are three of the most popular personal loan providers, but there are other options for financing a purchase, too. These alternatives to personal loans may include credit cards, peer-to-peer loans or buy now pay later (BNPL).

Be sure to compare the different kinds of lenders to find the best loan, and consider the alternatives. Use a personal loan calculator to understand the cost of borrowing and ensure that a loan fits your budget.