For a number of reasons, people tend to think of going to a bank when they need a loan, but there are plenty of other options. Specialized, non-bank lenders don't offer the range of other services that banks do, such as deposit accounts and investments, but by concentrating on lending they may represent the right choice for someone who is primarily concerned with getting a personal loan.
So how do bank loans stack up against credit from specialized lenders? To make this comparison, you should focus on three key factors: lending standards, cost, and service.
The Dodd-Frank reforms that were passed in the wake of the financial crisis have forced many banks to tighten their lending standards, making it more difficult to qualify for a personal loan. In contrast, non-bank lenders are generally not as restricted, and therefore may be more likely to approve a loan.
To a large extent, this comes down to your credit score. Banks are heavily dependent upon traditional credit scores, so if you don't have a good one you will likely find bank loans tougher to come by. Specialized lenders, on the other hand, may be more open to evaluating you based on non-traditional measures of creditworthiness.
That doesn't mean a non-bank lender is going to be eager to make a loan to someone with a terrible credit history. Where it may come in handy is for borrowers who have made little or no use of credit in the past. Non-bank lenders may be more willing to look at factors like income and job tenure to assess what kind of credit risk you represent. This is not only helpful for a getting a loan now, but can be an important step in building a credit history that will make it easier for you to get credit in the future.
There are factors working both in favor of banks and against them when it comes to cost.
A clear advantage for banks these days is access to low-cost capital – the funds needed to make loans. Money is available to banks from the Federal Reserve at a fraction of 1 percent. Banks can also use funds from customer deposits to make loans, while paying very little for those funds – an average of just 0.06 percent on savings accounts. These factors give banks access to capital for much less than it typically would cost a non-bank lender.
On the other hand, banks have expenses that non-bank lenders typically don't face. Big banks that built up extensive branch systems now find those branches a source of overhead that makes it tougher to compete. Banks are also more highly-regulated than non-bank lenders, and compliance with those regulations adds another layer of expense.
Given these pros and cons, the cheapest option for you may depend on which institution you look at, so a cost comparison should be a central part of shopping for a loan. When you do that cost comparison, just remember that there are two major components to loan costs – the interest rate charged and the fees associated with the loan. Be sure to factor both into your decision.
People don't often think of service when it comes to getting a loan, but it frequently becomes an issue at some point during the repayment period.
Banks have been cutting their loan servicing staffs lately, which might make it more difficult to get an answer on a question about your loan, or to work out solutions to repayment problems.
Here, a key question to ask is whether the lender typically services their own loans or sells them off to and independent servicing firm. There isn't necessarily anything wrong with having your loan serviced by a third-party firm, as long as you are aware that the lender you dealt with up front might not be who you have to deal with if something comes up a year from now.
The Bottom Line Is Choice
What's the bottom line here for somebody who wants a personal loan? Are bank loans the better choice, or should they look for a specialized lender?
Each source of credit has its particular characteristics and its own advantages and disadvantages – and then, even within each category of lender, individual institutions vary greatly as to lending standards, rates and other factors.
What makes it important to consider non-bank lenders is that they add to the choices available to you, and when consumers have more choices, they tend to get a better deal. Online sites like LendingTree.com make it easy to compare loan offers from both bank and non-bank lenders, so why not consider the widest range of choices possible?
Ultimately, the best fit will come down to the specifics of your situation and marketplace conditions at the time you shop for a loan. Considering both bank and non-bank options for a personal loan will increase your chances of finding that best fit.