7 Alternatives to Personal Loans
Although personal loans can be used for just about any purpose, they may not be the most affordable or convenient option depending on your financial circumstances. To help you explore other loan and credit options available to you, we cover various alternatives to personal loans below.
7 personal loan alternatives
|What it is||What it’s best for|
|1. Credit card||A line of credit you can draw from on a rolling basis, up to a limit. May offer low promotional rates for those with strong credit.||If you prefer to borrow as needed and can afford to zero your balance every month|
|2. Personal line of credit||A line of credit that lets you borrow on a rolling basis, up to a limit. May offer higher credit limits than a credit card.||If you need a higher credit limit or a low-cost cash advance|
|3. Peer-to-peer loan||A loan that is funded by investors rather than a single financial institution, with a simpler application process.||If you can’t qualify for a traditional loan|
|4. Home equity loan or home equity line of credit||A loan or line of credit that lets you borrow against the value in your home.||If you have equity in your home and can avoid the risk of foreclosure|
|5. 401(k) loan||A loan that draws money from your retirement account instead of borrowing from a lender.||If you have a stable job and can pay off the debt in five years or less|
|6. Salary advance||An agreement made with your employer to receive some or all of your next paycheck in advance.||If you have an employer that offers this no- or low-cost option|
|7. Small business loan||A financing method to help businesses cover their day-to-day expenses.||If you own a business that has consistent revenue|
1. Credit card
Credit cards allow you to make purchases and pay back what you owe little by little over time or all at once. If you repay your balance in full within a month, you’ll avoid interest charges.
Unlike the lump-sum amount you get with personal loans, credit cards offer you a revolving line of credit. This allows you to use as much of your credit as you want, as long as you stay under a previously-specified credit limit. You also have the freedom to pay as much toward your debt, provided you put down at least the minimum every month.
If you have good credit, you can also get access to low interest rates and even 0% APR introductory periods that last 12 months or longer via the best balance transfer cards. In cases like these, if you pay your credit card balance in full before the period is over, you won’t be charged interest. If you don’t repay the full balance before the introductory period ends, you’ll continue to accrue interest on the remaining balance
For borrowers with a limited or no credit history, a secured credit card can be one way to build credit. All you need is your personal information and a security deposit, which acts as your credit limit.
However, these alternatives to personal loans often come with higher interest rates than personal loans, so you’ll want to pay off any debt as quickly as possible.
Pros and cons of a credit card
Some credit cards offer an 0% introductory interest rate for a fixed period.
You can avoid interest by paying off your balance in full every month.
You may earn rewards if your credit card comes with such a program.
Credit cards can offer you additional protections like extended warranties on major purchases.
Credit cards typically have higher interest rates than personal loans.
Open access to a line of credit can bury you in debt if you can’t stop borrowing.
Your credit card company can cancel your introductory APR if you make a late payment.
Is a credit card right for you? Although there are offers available for those with OK or bad credit, credit cards are best for those with at least good credit, as this affects your interest rate, loan terms and any special introductory offers you receive.
If you like paying as much or as little as you want toward your debt every month, you may enjoy the freedom that comes with credit cards as well. But you’ll need a solid debt repayment plan if you go this route. Otherwise, you’ll find yourself needlessly paying hundreds or thousands of dollars in interest.
2. Personal line of credit
A personal line of credit works similarly to a credit card; you don’t follow a set payoff schedule for your debt, and you can tap your credit line on an as-needed basis. Personal lines of credit can come with lower interest rates than credit cards, however.
One downside to this alternative to a personal loan is that they can come with additional fees compared with a credit card. Your lender may charge you an annual or monthly fee if you maintain your line of credit. Meanwhile, credit cards that charge an annual fee offer rewards, such as cash back on every purchase. You won’t find that on a personal line of credit.
Pros and cons of a personal line of credit
You don’t have to decide how much to borrow upfront and can easily access funds.
Offer more flexibility than personal loans in how you can use funds.
Can help people with inconsistent income and expenses make ends meet without applying for a new loan every time.
Some lenders charge borrowers a fee for keeping the line of credit open.
Borrowers with poor or short credit history might not qualify.
Opening a line of credit may tempt you to spend more than you can afford.
Is a personal line of credit right for you? This personal loan alternative is great if you don’t know exactly how much you need to borrow — which makes them especially helpful for costs that can be hard to estimate, such as with a home improvement project. Their interest rates make them a great alternative to credit cards and personal loans as well.
However, you’ll want to consider other options if you don’t have great credit, as you’ll have difficulty qualifying for this alternative to bank loans.
3. Peer-to-peer loan
Peer-to-peer (P2P) loans are like personal loans, except they are funded by individual investors rather than a single lending institution. Lending marketplaces like LendingClub and Peerform determine initial loan approval before putting eligible candidates’ applications in a marketplace. There, investors will review your application before deciding whether to help fund the loan.
Because your application may be reviewed by individuals, they may be more willing to overlook issues in your credit history or may take into account other unconventional signs of creditworthiness. This makes this option great for those who are unable to qualify for a loan from a traditional lender.
Pros and cons of a peer-to-peer loan
You may be able to get your money in as little as one business day after your loan is approved.
You may qualify for some P2P loans with a lower credit score.
Some P2P loans give borrowers the flexibility to delay a payment without incurring extra fees.
No guarantee that your loan will get funded on some platforms.
You may need to pay an origination fee equal to 1%-8% of the loan amount.
P2P loan applications may take longer to review than traditional loans.
Is a peer-to-peer loan right for you? Peer-to-peer loans are a great option to consider if you have credit issues that prevent you from applying for a loan through traditional lenders.
But although some P2P lenders may offer you some leeway in the criteria needed to qualify for a loan, the approval process can take up to a week as multiple investors review your application — which may be an issue if you need the money right away. On top of that, these loans usually come with high origination fees, which may cost you more money upfront compared with other loan options. (This type of fee is just as common with traditional personal loans.)
4. Home equity loan or home equity line of credit
Although home equity loans and home equity lines of credit (HELOC) refer to two different products, both are ways for homeowners with a lot of equity in their home to borrow against that equity.
- A home equity loan is a second mortgage that gives you a lump-sum amount of money that is repaid on a set schedule. The amount you can borrow is determined by the amount of equity you have in your home, and terms range from five to 15 years.
- A HELOC functions much like a credit card. You borrow as much as you need (within a certain limit) on an as-needed basis. The line of credit is backed by your home and typically comes with a variable rate. Unlike with a credit card, there is a designated draw period, after which you pay off the balance in fixed installments.
If you decide to move forward with either of these alternatives to personal loans, you’ll want to gather information, such as how much you owe on your mortgage and your property value, in addition to typical documents you’d need when applying for a loan or line of credit, like personal identifying and income information.
The lender may reassess the value of your home before approval. Once you receive this approval and complete necessary paperwork — which come with closing costs — you’d then receive your funds to use as you please.
Pros and cons of borrowing against equity
Offers lower interest rates than those offered by a personal loan.
You’re free to use your funds for almost anything.
Can come with high borrowing limits, depending on your equity.
Using your home as collateral means that your lender can seize it if you can’t repay your debt.
You’ll pay a percentage of the amount you borrow in closing costs.
Application process can be long compared to other products.
Is a home equity loan or home equity line of credit right for you? This option is best for homeowners who possess plenty of equity in their home. Because you use your home as collateral, these borrowing options come with lower interest rates than personal loans. However, you’ll want to make sure you’re able to pay off your debt in full. Otherwise, you risk your lender repossessing your home — a chance that many are not willing to take.
5. 401(k) loan
A 401(k) loan allows you to borrow against funds in an employer-sponsored retirement plan. Unlike personal loans, you don’t need to submit an application and supporting documents to qualify for a 401(k) loan and you don’t need to meet any minimum credit score requirements. This makes them ideal for borrowers who don’t meet the loan qualifications of a traditional lending institution.
However, these loans come with strings attached. For one, you’ll pay tax twice on the funds you use to repay your 401(k) loan. You’d have to make that money back first, which is subjected to income tax before you ever receive it. When you withdraw these funds again down the line, you’ll pay income tax on it again.
If you leave your current employer while your loan is still active, you’ll pay additional taxes on it if you don’t repay the entire amount within 90 days, since it will then turn into a taxable distribution.
Pros and cons of a 401(k) loan
The loan application process is quick and simple, and can even be done online.
You can access these loans even if you have poor credit.
Interest you pay on the amount you borrow goes back into your retirement account rather than to a lender.
Not all plan providers offer 401(k) loans to their employees.
You’ll be taxed twice on the interest of the amount you borrow.
You lose the earnings you would have made if you kept the money in your account.
You may not be able to borrow as much as you need.
You’ll want to consider your long-term plans carefully before you make your decision, though. 401(k) accounts are meant to safeguard your future, and borrowing from them can have a detrimental effect on your retirement plan if you’re not careful.
6. Salary advance
A salary advance refers to a loan that an individual borrows from their employer. By taking funds from their future paycheck, they can pay for emergency expenses without applying for funds through traditional lenders.
This loan alternative is typically offered through payroll advance programs, or granted on a case-by-case basis by employers. Although employers don’t charge fees or interest on paycheck advances, some may charge an administration fee or interest if they use a third-party lender to offer the service. If you go this route, you will be required to repay the loan in installments, either through direct payments or deductions from future paychecks.
If your employer doesn’t offer this alternative to a personal loan, you could explore paycheck advance apps that are far more safe than traditional payday loans.
Pros and cons of a salary advance
Salary advances can be a fast way to fund an emergency expense.
You may be able to qualify for a paycheck advance even if you have a low credit score.
You won’t get charged any fees or interest on paycheck advances offered directly through the employer.
Not all companies offer salary advances.
Your future paychecks could be lower than usual as you repay the advance.
You may have to reveal personal details about your financial situation to your boss.
Companies may limit paycheck advances to certain qualifying expenses, such as hospital bills or car repairs.
However, paycheck advances allow those with poor credit to get access to emergency funds they wouldn’t be able to get otherwise.
7. Small business loan
For business owners, there are a variety of loan products you could access. Where personal loans are meant to fund personal expenses, small business loans typically cover the expenses incurred by a company — think purchases like a new computer system, rent for your office or your marketing budget. There are other differences to consider when comparing a business loan versus a personal loan.
You can expect to undergo a much lengthier application process for business loans. Lenders will generally take a look at your business credit history, business plan, balance sheet, cash flow history and projections, resource management and other factors to determine your eligibility and interest rate.
Pros and cons of a small business loan
Business loans tend to have lower interest rates than personal loans.
A business loan can help keep your personal finances separate from your business expenses.
New companies might have a harder time qualifying for a small business loan.
Borrowers may need to complete lengthy paperwork and submit a business plan.
Some lenders will require you to put up collateral for your business loan.
Is a small business loan right for you? As you can imagine, small business loans work best for established business owners who can rely on their company to bring in consistent revenue over time. But because of the sheer amount of paperwork involved in submitting an application for this sort of loan, you may be better off pursuing other options if you need money immediately. Emergency loans could be yet another useful form of borrowing.