Are Personal Loans from Banks Better? Here’s Everything You Need To Know

A  study conducted by Business Insider revealed that close to 40% of millennials don’t visit banks and only 38% of millennials in the U.S. visit a bank for something besides the ATM. Despite the growing trend to conduct most or all bank business online, there are advantages to getting a personal loan from a bank. It’s a good idea to visit an actual branch and talk to a real live person. Then, of course, you can go back to your computer to make the loan payments in your comfy chair.

Is a personal loan from bank the best option for you? Here are some factors to consider when trying to decide on your best loan option.

Why banks?

If you have good credit (a credit score of 700 or higher) and a long and unblemished history with your bank, you can often find the best interest rates for personal loans at your bank. It can also be reassuring to interact with a banker who can answer any questions you might have about your loan.

Credit unions vs banks

Credit unions are similar to banks in that they offer personal service in a physical building.  Because credit unions are not-for-profit institutions, you may feel more secure seeking a loan from one, rather than from one of the big banks. Many banks have been mired in controversy and problems since the financial crisis; credit unions, on the other hand, have remained above the fray.

If you are a credit union member and if you have a credit score of 700 or higher, you will likely be able to find a good interest rate at a credit union.

What about online lenders?

If you desire speed and ease, an online lender may fit your needs better than visiting a bank. The entire application process is conducted online and you can usually get an answer on what type of loan you are eligible for within minutes. However, if you prefer to talk to someone in person, a bank will be a better choice for you.

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Super Money make it easy to compare a variety of online lenders in one spot. You can read customer reviews and learn what type of loan your credit score will allow.  Complete an online application to see what type of loan you might qualify for. Take a look at Super Money’s reviews of online lenders to see what your options are.

How about a credit card instead?

If you don’t need cash, a credit card may be a better option than a personal loan from a bank. If you have a decent credit score, you’ll likely get a better interest rate from a credit card and the term of repayment won’t be set in stone, as it typically is with a bank loan. However, if you do indeed need cash, a bank loan is probably the better way to go.

Payday loans

As a last resort, you can try a payday loan, but your interest rate will be extremely high, which may make repayment difficult. But if you have poor credit (a score below 630) and are in dire need of cash, this may be your only option.

If a personal loan from a bank is still your first preference, make sure you’re ready with the proper documents and questions before stepping into the branch.

Shop around

Before heading to your bank’s branch and inquiring about a personal loan, shop around online or make a few phone calls to check out rates and repayment terms. Rates and terms vary and, as with anything else, it’s smart to compare options.

For example, one bank may offer you a loan with a lower interest rate, but it may have higher origination fees (the charge for originating the loan). A 1% origination fee is common. For example, a 1% fee on a 5,000 loan would cost $50.

The annual percentage rate (APR) is the interest rate combined with all other loan fees and is a very important factor to consider. It can provide a bigger picture than the interest rate alone.

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You should also consider whether you want a loan with a fixed or variable interest rate. Loans with variable rates often have lower interest rates to begin with, but the rates could potentially rise later, resulting in an increased loan payment that doesn’t fit your budget.

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Know your credit score

After you’ve shopped around but before you make an appointment at a bank, know your credit score. A credit score is a number calculated based on your credit history, including late payments, credit to income ratio and other factors. Credit scores range from 300 to 800. A credit score is considered “excellent” at 700 or above. Until 2016, you had to pay to get your official FICO score, but Discover launched a service where you now see your official FICO score for free.

You should also get a free copy of your credit report (a longer more detailed document than your FICO score) from the Federal Trade Commission.  Rather than just a score, this report includes information on where you live, how you pay your bills, and whether you’ve been sued or have filed for bankruptcy. If you see any discrepancies on your report, fix them before applying for any type of bank loan. For example, you can write to the credit reporting company and request a correction.

Your credit score can determine whether or not you get a loan and what interest rates and loan terms you will be offered. Typically, the higher your score, the better rates you’re offered.

Understanding your payment

There are some other key terms to know that relate to loans. It’s important to understand interest rates and APR. You should also be familiar with amortization, which is the number of years used in calculating the monthly payment. Loans that are amortized over a longer period than their loan term will have a balloon payment. A balloon payment is the total final payment if the loan is amortized over a period of time longer than the loan term. (If the loan term is the same as the amortization, this amount is always zero.)

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Call ahead

You may need to make an appointment to speak to a banker. Also, ask what you need to bring to complete your application. Make a checklist of required documents, which can vary from bank to bank, but will likely include proof of income, such as a paystub, and any bank account numbers. Again, talk to the bank directly and ask what you need to bring in.

Offer collateral  Some banks will consider collateral for your personal loan in return for a better interest rate. Ask the banker what your options are. Homes and cars are the most common forms of collateral, but you can also use watercraft, motorcycles, as well as pieces of equipment that have a title of ownership.

Make payments on time

Once you’ve secured a loan, be sure to keep up with payments. This will help you avoid late fees and help build good credit.

For customer reviews and more information on which banks are better, visit SuperMoney’s recommendations.

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