If you’re looking for a personal loan, you have options beyond the online financial startups getting much of the publicity these days. Before you apply, look for the best offers from these three types of lenders:
Banks long were the leaders in personal loan originations. As recently as 2013, banks accounted for 40 percent of all personal loan originations, according to data from the credit bureau TransUnion. Newer players have cut into several banks’ business, but banks are still lending tens of billions of dollars annually.
Here’s what you need to know about borrowing from a bank:
- Banks in general demand higher credit scores from borrowers than other lenders. About two-thirds of all bank personal loans go to borrowers who have a credit score of at least 661, according to TransUnion.
• Although many banks don’t disclose credit score requirements, some do. TD Bank, for example, says it will issue personal loans only to borrowers with a credit score of 680 or above.
• Since banks lend to borrowers who are seen as less risky, they also tend to issue larger loans on average.
Credit unions issue fewer loans than banks but still are significant players. In 2014, credit unions originated a bit less than 30 percent of all personal loans. Membership is one key difference between banks and credit unions. You have to be a member of a credit union to qualify for a loan.
Here’s what you need to know about borrowing from a credit union:
•Credit unions are much more likely to issue a loan to someone with damaged credit. More than half of all credit union personal loans go to borrowers with credit scores of 660 or below, according to TransUnion. Nearly one-quarter are issued to subprime borrowers, people with credit scores of 600 or less.
•The average credit union loan is $3,502, significantly less than the average bank loan of $6,050.
•Because credit unions are nonprofit institutions, their mission may influence their lending decisions.
Since Navy Federal Credit Union caters to members of the armed forces, Coast Guard and the National Guard, it may offer loans to borrowers who normally wouldn’t be approved elsewhere, says Joe Pendergast, the assistant vice president of consumer lending at the credit union, the nation’s largest.
“Navy recruits: No one else will give them a shot at a loan,” he says.
Pendergast says Navy Federal issues loans “to opposite ends of the credit spectrum.”
This is a catch-all name for firms that aren’t banks but do offer financial products such as loans. Some of them, like marketplace lenders, operate solely online and raise money, in part, by allowing people to invest in the loans. Others have branches and may offer a wider range of loan products. TransUnion data show that finance companies made more personal loan originations in 2015 than banks did.
Even though nonbank lenders have increased originations, Al Goldstein, CEO of Chicago-based marketplace lender Avant, says his firm doesn’t view banks as competitors because they’re not going after the same customer. The average credit score of an Avant borrower is 655, Goldstein says.
“We just don’t think they’re going to play in our space,” he says.
Here’s what you need to know about borrowing from a finance company:
•Finance companies are by far the most likely to issue a loan to a borrower with bad credit. Fully 77 percent of all personal loans go to borrowers with credit scores of 660 or below, according to TransUnion. About half are issued to subprime borrowers.
• Finance companies issue the smallest loans on average – about $2,200.
•They may be trying to change their reputation. In 2015, financial technology companies, which include marketplace lenders, increased their personal loan originations to consumers with a credit score between 601 and 720 by 122 percent, according to TransUnion. Finance companies also increased loans to this credit segment but at a far slower pace.
Dave Hogan, executive vice president of decision analytics and marketing for OneMain Holdings, the Evansville, Ind.-based, parent company of nonbank lenders Springleaf Financial and OneMain Financial, says branches help set his company apart from other nonbank lenders.
“Customers also value the personal service in branches in their community, as well as the fact that we can serve customers across the credit spectrum,” Hogan says.