Is Personal Loan Shopping Worth It? Our Expert Weighs In

I’ve spent the better part of the last 35 years telling consumers to shop for loans in my role as a loan originator and personal finance writer. Given how common the advice is among other fin-fluencers, I figured there would be plenty of data to show just how valuable personal loan shopping is. 

I was wrong. How could that be possible, considering that personal loan rates range from below 7 percent to an eye-watering 36 percent? To get to the bottom of whether personal loan shopping is worth it, I put myself in the shoes of an average borrower and compared loan options with a variety of lenders. While I still believe that loan shopping is worth the time, I discovered a few surprises along the way.

The mission: To find the best debt consolidation loan

With so much news about Americans struggling with credit card debt, I decided to shop for a debt consolidation loan worth $20,000. Remembering that many consumer budgets are squeezed by inflation, I opted for a seven-year (84-month) term to keep the payment as low as possible. I also wanted to avoid fees so that all the borrowed funds could be used to pay off debt balances.

Most financial websites advise shopping with a variety of different sources for personal loans, including institutional banks, credit unions and online lenders. I figured I’d also put Bankrate’s personal loan marketplace to the test as well, and report my findings.

Personal loans from banks

Best for: Borrowers with excellent credit

I started my search where most consumers begin theirs — I Googled “best debt consolidation loan” and visited the banks that appeared in the search results. I also considered the bank I use for my own financial needs here in Nashville: U.S. Bank. My credit score is about 700, so I kept that in mind when reviewing bank loan requirements. 

What I liked

The starting rates offered by banks grabbed my attention right away. They were much lower than the average rates I’ve seen online — in some cases, even lower than current mortgage rates. The majority of banks I considered didn’t charge origination fees, which means that the full loan amount could go toward paying down debt.

The banks I reviewed were also more likely to disclose what it takes to qualify for the best rate. Some banks even listed the percentage of applicants who have recently snagged the headline rate.

Overall, I found it simple to locate the information I needed from institutional banks. As a result, I spent an average of only 10 minutes on each lender’s site.

What gave me pause

I discovered that banks typically don’t offer repayment terms longer than five years unless you plan to use the funds for home improvement. Plus, to qualify for the lowest rate, I needed a credit score well above the 700 threshold, and I would have to select a repayment term of three years or shorter.

Banks by the numbers

U.S. Bank and Discover were both good options, but if I weren’t already a U.S. Bank customer, I wouldn’t qualify for its seven-year term. (Non-customers can only access loans with terms up to five years.) Although Wells Fargo offered a loan that would meet my needs, it only lends to borrowers who have banked with them for at least a year.

Personal loans from credit unions

Best for: Lower rates for shorter terms

Credit unions are often touted as the most affordable way to borrow a personal loan, due in large part to the 18 percent rate cap required for federal credit unions. Some lenders charge rates as high as 36 percent, which would double the cost of interest over a credit union. In this category, I shopped with two of the biggest credit unions in the country, plus an institution in my community.

What I liked

As expected, I did find the lowest rates at credit unions. Not only were the maximum rates lower than any other lender, but the starting rates were also competitive. Credit unions were also more transparent about how your choice of repayment term impacts the lowest rate you might receive. Like banks, origination fees were a rarity at credit unions. 

If I needed a very small personal loan, a credit union would be a good option — they offer loans as small as $250. Although I wasn’t interested in a secured loan for the purposes of this experiment, I did find creative options, like a passbook loan with a 2.10 percent rate and a repayment term of up to 12 years. Members with high savings account or CD balances could borrow against their savings to pay off higher-rate debt.

The transparency offered by credit unions also made it simple to find the information I needed. But because I also needed to review membership requirements, I spent longer on each credit union website than I did with the banks: an average of 15 minutes.

What gave me pause

Only one of the credit unions I considered offered a term longer than 60 months. And while the starting rates were reasonable, the rates available for longer terms were several percentage points higher. A higher rate would negate much of the benefit of debt consolidation. (To be fair, most lenders charge higher rates for longer terms; credit unions are just more transparent about their rate structure.)

But to borrow a personal loan, I’d have to become a credit union member, which involves jumping through a few hoops. I lack the military service record to qualify for membership with Navy Federal Credit Union, and the other two institutions require applicants to join a partnering charitable organization for a small fee. I also noticed that some credit unions require membership for a certain number of days before you’re eligible to apply for a loan — something to remember if you need a loan right away.

Credit unions by the numbers

Credit unions offer a broader array of terms without restrictions on the purpose than banks. However, they require the extra hoop of applying for membership before receiving a loan. (Most credit unions allow non-members to apply, but you must complete the membership process before receiving loan funds.)

Personal loans from online lenders

Best for: Borrowers with lower credit scores or those who need fast funding

What I liked

The minimum APRs at online lenders were competitive with the banks and credit unions I considered. Plus, some online lenders offered a rate discount for direct creditor repayment — the lender will use your loan funds to repay your creditors on your behalf, streamlining the debt consolidation process. I didn’t find that perk at any of the credit unions or banks. 

These lenders also quoted extremely fast loan approval and funding times — some claim to disburse funds the same day you apply and are approved. Although that wasn’t as important to me since my goal was to snag the lowest rate on a seven-year term, it’s worth remembering for borrowers seeking an emergency loan.

What gave me pause

Two out of three of the online lenders I shopped for had a drawback that I didn’t find with the credit unions or banks: origination fees. These upfront costs can be as high as 12 percent of the loan amount, taking a significant bite out of the funds you’ll receive. If you select a lender that charges origination fees, you may have to borrow more money than planned to cover the fee.

While the starting rates were in line with banks and credit unions, the online lenders charged higher top-end rates, as high as 35.99 percent. That gave me the impression that these products may be geared toward fair and bad credit borrowers, whereas the banks and credit unions target customers with stronger credit profiles. 

Online lenders by the numbers

It took a bit longer to sort through the fine print and figure out the fees and qualifying requirements, resulting in an average of 20 minutes spent on each online lender.

Personal loan from lending marketplaces

Best for: Borrowers who don’t know where to begin and want to compare several lenders at once

I didn’t know much about marketplace lending until I started writing about it. The primary benefit of using a marketplace to find a debt consolidation loan is the ability to quickly review the basic details of multiple lenders at once. I checked out Bankrate’s page to see whether the process was simpler than doing the legwork myself at individual banks, credit unions and online lenders.

What I liked

Right away, I could see the APR range, loan term, loan amounts and minimum credit score of each lender featured on the rate table. When I wanted to take a deeper dive into a particular lender, I could also see whether it charged any fees, as well as any notable pros, cons or special features. This was a nice change from scouring the small-print sections of each lender’s website for the basic information I needed.

I found two lenders that offer no-fee consolidation loans pretty quickly, and the table made it easy to see that they offered the repayment term I’m looking for.

What gave me pause

When I clicked to “See offers,” the small print revealed that I could get prequalified with several lenders. While I had hoped to apply directly with the two lenders that stood out to me, I liked the convenience of receiving offers that I could either accept or reject. 

Lending marketplaces by the numbers

I honestly loved the marketplace shopping experience. The information was easier to review without searching through eye-squintingly small fine print. Although many major banks and credit unions aren’t listed on marketplace sites, the featured lenders offered competitive terms and fee-free flexibility. After reading lender reviews and submitting the prequalified offers form, I’d spent a total of 20 minutes on the page and received two reasonable offers.

The results

I spent a little under three hours shopping for a loan, and in the end, the lenders that best matched my needs came from the marketplace website. A few key things I learned from the experience:

• Borrowers with excellent credit can find competitive debt consolidation loans from a variety of lenders, but only through shopping around can you find the lender that will offer the best rate for your specific needs.
• If you have a certain lender in mind, applying via that lender’s website is the surest way to understand your eligibility with that company.
• If you’re unfamiliar with popular lenders or don’t know where you want to borrow, visiting a lending marketplace like Bankrate can help you narrow the field.
• Remember that if you want a lender’s lowest rate, you may have to select a short repayment term. Rates are typically higher for longer terms.

So, is personal loan shopping worth it?

For personal loans, loan shopping is definitely worth it. I ruled out lenders that would never meet my needs, even though I was drawn to the low start rates — this helped me avoid pointless applications that would ding my credit. I also found that some of the online loans with the lowest rates have a bunch of fees attached that increase the total cost of borrowing.

Among the lenders that offered the combination of rates and terms that I was seeking, shopping around helped me zero in on the most affordable loan with the best features. It took a long time to explore individual banks, credit unions and online lenders, so having all of that information at my fingertips on the marketplace site was a real time-saver.