Personal loans from banks: 5 things to know

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In a Nutshell

Getting a personal loan from a bank has its benefits and drawbacks. You may qualify for certain perks if you’re already a customer, and you may be able to find a loan without an origination fee. But not all banks offer personal loans, and it may be wise to compare your bank’s offer with those from other types of lenders.
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If you need a personal loan, your first thought may be to check with your bank. But depending on your financial situation, that may not be your best option.

Some personal loans from banks can come with benefits, like no origination fee and interest rate discounts for existing customers.

But depending on your bank, you may run into problems getting approved if your credit needs some work. And your bank may require collateral for the loan. Here’s what you need to know before you apply.

1. Banks have reputations to stand on

The personal loan industry is full of legitimate lenders, but there are also scammers out there looking to take advantage of you. By going with a bank that you know and trust, you’ll probably feel more confident that you’re not handing over your personal information to a scammer or paying an advance fee for loan funds you’ll never see.

How do you spot a personal loan scam? For starters, legitimate lenders will never guarantee approval before you apply for a loan. Also, origination fees are typically deducted from your loan funds — so if someone asks you to pay them a fee upfront to get the loan, it’s likely a scam.

Another red flag: You can’t find a physical address for the lender online, or its email offer has a bunch of spelling and grammatical errors. If you’re not sure, do some research to see if the lender is licensed and has a positive track record. The Consumer Financial Protection Bureau has contact info on its website for financial institution regulators by state.

2. You may qualify for a relationship discount

Some personal loans from banks come with perks, such as a relationship discount. With Wells Fargo, for example, you’ll get a 0.25% interest rate reduction if you have a qualifying consumer checking account with the bank and enroll in automatic payments. Citizens Bank also offers a discount of 0.25% with an existing eligible account (and an additional 0.25% for automatic payments).

Not all banks offer this relationship perk though, and even if you qualify for one, it’s still possible to get a better rate from another lender. Check the bank’s website or ask a loan officer at the bank if there’s a relationship discount you qualify for.

3. You may not be able to get one

Depending on where you bank, you may not have the opportunity to get a personal loan there. Even some big banks like Bank of America and Chase don’t provide personal loans to their customers.

If you’re considering getting a personal loan through your bank, save yourself some time and check to see if it offers them. You can do this by going to your local branch or checking the bank’s website.

Another thing to consider is that banks often require good or excellent credit to get approved, which can force you to start looking elsewhere. The definition of good credit will vary by lender, but it’s always a good idea to see where you stand before you apply. For some context, the consumer credit bureau Experian considers credit scores of 670 to 739 (on a scale of 300 to 850) to be good. While for Equifax, 700 is the minimum score considered good.

4. You may need to offer up collateral

Your bank may offer a mix of secured and unsecured personal loans, but depending on your credit situation, you may not qualify for an unsecured option. This means that you could need to provide collateral to secure a loan — a savings account, for example, or some of your property, like your home.

If you don’t pay back the loan as agreed, the lender can typically then take your collateral to satisfy the debt.

5. You may get a better offer somewhere else

Banks aren’t the only financial institutions that offer personal loans. Credit unions and online lenders also offer them and may be better options.

Credit unions tend to offer lower-interest personal loan rates than banks, primarily because they’re not-for-profit organizations owned by their members. Instead of having a goal of maximizing profits for stockholders, they return their profits to their members in the form of better products and services.

That said, you will need to meet specific eligibility requirements to become a member, such as living in a certain area, working for a particular employer or belonging to a participating organization.

Online personal loan lenders can also be a great choice because they can offer more flexibility. Some lenders, for instance, may be willing to work with people who are trying to build or rebuild their credit. On the flip side, many online lenders charge origination fees, which can be as high as 8% — but this is also true for credit unions and banks, so make sure to shop around.

Bottom line

If you’re considering getting a personal loan, consider checking with your bank to see if it offers special discounts or deals for existing customers. And before you apply, be sure to compare what you find with offers from credit unions and online lenders.

Depending on the lender, you may even be able to get prequalified without a hard credit check, which can hurt your credit scores.

As with most financial products, shopping around is one of the best ways to save money and make sure you get the best loan for your needs.

About the author: Ben Luthi is a personal finance freelance writer and credit cards expert. He holds a bachelor’s degree in business management and finance from Brigham Young University. In addition to Credit Karma, you can find his wo… Read more.