Banks vs. Credit Unions: Which Is Best for Taking Out a Personal Loan?

Fact checked by Vikki VelasquezReviewed by Katie MillerFact checked by Vikki VelasquezReviewed by Katie Miller

The best place to take out a personal loan is from the lender that offers you the lowest interest rate and fewest fees and makes it easy to complete an application with a quick disbursement. 

When it comes to borrowing money, you have a few choices, including online lenders, banks, and credit unions. Here’s how to find which is best for taking out a personal loan.

Key Takeaways

• Many types of lenders for personal loans are available, including banks, credit unions, and online lenders.
• Banks, particularly the larger, national ones, tend to have more branches and more widespread ATM networks than smaller credit unions.
• Not everyone will qualify for a personal loan from every type of lender, so it’s important to review which lenders would best suit your needs.

Personal Loans from Banks

Traditional banks are everywhere, including big, worldwide institutions or local community banks. Most banks offer loans, including personal loans.

Pros of Personal Loans from Banks

• Known history: Some people may feel more comfortable borrowing from a bank due to name recognition. Trust can be a big factor when dealing with money, and it’s easier to feel safe working with a bank when it has a proven track record.
• In-person access: For those who prefer brick-and-mortar financial institutions, you might want to work with a national bank over a credit union, as the former is more likely to have a greater number of branches and a more widespread ATM network. Having physical access to support and money is an important factor for some, especially when it comes to dealing with debt.

Cons of Personal Loans from Banks

• Harder to qualify: Generally speaking, borrowers hoping to apply for a personal loan from a bank will likely need to have a fairly high credit score. As personal loans are often unsecured, there tend to be stricter credit requirements to offset the risk of giving out a loan without collateral.
• Higher interest rates and fees: Banks tend to charge higher interest rates and more fees compared to their credit union and online lender counterparts. If you don’t qualify for a discount rate, you might end up paying more through a bank than you would with another lender.

Best Banks for Personal Loans

Personal Loans from Credit Unions

Credit unions and banks are fairly similar, but one of the biggest differences is that banks are for-profit financial institutions, while credit unions are not-for-profit. You can get a personal loan from a credit union, too.

Pros of Personal Loans from Credit Unions

• Easier qualification: Many credit unions work with customers regardless of their financial circumstances. If you think you might not qualify for a personal loan elsewhere, a credit union may be more inclined to give you a chance.
• Potentially lower interest rates: For most federal credit unions, personal loan interest rates go as high as 18% for approved borrowers with fair or bad credit. Banks and online lenders might charge you higher rates, often upward of 36%.

Cons of Personal Loans from Credit Unions

• Usually must be a member: Many credit unions require you to join before taking advantage of their products, including personal loans. You can often join and borrow the same day, but some credit unions vary in their membership requirements. Some may want you to be a member for some time before taking out a loan, which could be a problem if you need to secure funding quickly.
• Accessibility limitations: Most credit unions serve their local communities and may not have a large number of branches. Along with that, many credit unions don’t have the same resources that traditional banks do to keep up to date with the latest technology.

Best Credit Unions for Personal Loans

Personal Loans from Online Lenders

Online lenders offer personal loans to many different types of borrowers and circumstances.

Pros of Personal Loans from Online Lenders

• Easy access: Online lenders make it simple for most people to complete an application and download an app to manage their personal loans. 
• Pre-qualification: Like traditional banks, many online lenders offer pre-qualification, which lets you check to see if you’re eligible without triggering a hard credit check, all from the comfort of your home. Online applications are also often fairly straightforward and can be completed relatively quickly.

Cons of Personal Loans from Online Lenders

• Harder to qualify for: Like traditional banks, many online lenders require a higher credit score to qualify for a personal loan unless otherwise stated. That means if you have bad or even fair credit, you may have a tougher time getting a personal loan from an online lender.
• No physical locations: If you would rather have the option of visiting a brick-and-mortar branch, you likely won’t prefer to work with an online lender for your personal loan. As the name suggests, online-only lenders do not have any physical branches.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

Choosing a Personal Loan Lender

When it comes to choosing a personal loan lender, there are a few different ways to find one that works for you. Consider taking a multifaceted approach, including:

• Check your credit: See what a lender will find on your credit report before they do. Knowing your score and history will give you an idea of which lenders you may qualify for, ensuring you don’t have to complete a bunch of applications (and take several credit score hits) just to find that out.
• Get pre-qualified: If you’ve checked your credit, you know what you’re probably eligible for. Try to get pre-qualified with as many lenders as possible so you can compare a lot of different offers.
• Look at the complete cost: While the interest rate is a major factor, examine the total cost of the loan, including any fees, such as an origination fee, potential late fees, etc.
• Evaluate the overall lending experience: How long will it take you to get your funds? Can you call customer service and talk to a human if necessary? Do you have access to hardship programs if you’re not able to pay your loans? Not all lenders have the same offers (for instance, some have minimum borrowing amounts that are higher than others), so make sure you check out the whole picture before making a decision.

Is It a Good Idea to Get a Personal Loan from a Credit Union?

Whether or not getting a personal loan from a credit union is a good idea depends on your financial circumstances. On one hand, as they are not-for-profit institutions, credit unions are better able to charge lower interest rates on loans than for-profit banks. On the other hand, credit unions typically aren’t able to provide higher loan amounts than the larger banks. As such, a personal loan from a credit union might make the most sense if you only need to take out a small loan and/or can’t afford a high interest rate.

Why Might You Get a Better Loan Rate at a Credit Union vs. a Bank?

As for-profit businesses, banks are incentivized to generate as much profit as possible for their investors, and the best way for them to do so is by charging high interest rates on the personal loans they give out. Conversely, credit unions are owned by their members (i.e., their customers), so they have a greater incentive to keep interest rates as low as possible.

Is It Harder to Get a Loan Through a Credit Union or a Bank?

While a major advantage of banks is that they can provide higher personal loan amounts than credit unions, lending more money without requiring any collateral (since personal loans are typically unsecured) incentivizes banks to be more careful with whom they lend money. As a result, banks tend to have higher credit score requirements for borrowers than credit unions would for their personal loans.

The Bottom Line

Choosing a personal loan lender can require a little bit of work. But if you know what to look for, you should be able to make the right choice for your needs. Be sure to compare different lenders based on their total costs, discounts, and customer service before applying.

Read the original article on Investopedia.