Personal Loans

5 Alternatives to a Traditional Personal Loan

alternative personal loans

Many people turn to personal loans for the funds they need to cover a major expense. This type of loan can be used for just about anything, from covering a medical bill to paying for a dream vacation. And the best part is that you don’t have to put your valuable assets on the line as collateral for an unsecured personal loan.

However, personal loans aren’t the only way to access cash. Here are a few other options to consider.

    1. Credit card
    2. Unsecured personal line of credit
    3. Peer-to-peer loan
    4. Salary advance
    5. Small business loan

5 alternatives to a personal loan

Even if you’ve found a competitive offer on a personal loan, it’s worth considering other ways to borrow money. Here are a few alternatives to personal loans:

1. Credit card

Your current credit card may be a viable option if you need quick access to cash and can repay the balance in full by the due date. Carrying a balance, though, means you could be hit with high interest charges.

If you need more time to repay your balance, you may consider a credit card that comes with a promotional 0% APR. The promotional period of these types of cards can last a year or longer. Repay your balance in full before that period ends, and you can dodge interest costs. That could make these a solid option for an upcoming expense.

Your existing credit card company may have also sent you paper checks that you can use to pay for something at a business that doesn’t take plastic, said Todd Christensen, an accredited financial counselor and education manager at Money Fit, which offers nonprofit credit counseling.

“Although these typically have very high interest rates, some companies offer their clients checks with a short or extended grace period,” he added.

Pros

  • If you’re making a major purchase, paying with your credit card could provide additional protections (like an extended warranty) on the product.
  • Some credit cards offer customers an intro 0% interest rate for a fixed period.
  • Paying off your balance in full every month can help you build a healthy credit history.
  • You may earn rewards if your credit card comes with such a program.

Cons

  • Taking on new debt is easy with a credit card.
  • Credit cards typically have high interest rates.
  • You might pay a late fee if you miss the due date.
  • Your credit card company might cancel your introductory APR if you make a late payment.

2. Unsecured personal line of credit

Not sure how much money you need to borrow? A personal line of credit could be the best way for you to get the funds. Unlike a personal loan, which gives borrowers money in one lump sum, a personal line of credit allows you to take out money as you need it but up to a certain limit.

“It’s essentially a personal loan that works like a credit card. It doesn’t come with a set payoff schedule for when the debt will be fully paid off, and you can use it over and over again,” said Christensen.

Pros

  • You don’t have to decide how much to borrow upfront.
  • It can help people with inconsistent income and expenses make ends meet without the need to apply for a new personal loan every time they need money.

Cons

  • Some personal lines of credit charge borrowers a fee every time they access the funds.
  • Borrowers with a short credit history or low income might not qualify for a personal line of credit.

3. Peer-to-peer loan

Traditional lenders, like banks and credit unions, aren’t the only place to go when you need a loan. You can borrow money from everyday individuals and investors through peer-to-peer (P2P) lending marketplaces, such as LendingClub, Peerform and Upstart. This can be a benefit to borrowers who may not qualify for loans from other financial institutions.

Like personal loans, many P2P loans come with fixed interest rates and a set monthly payment schedule. The criteria to qualify for a P2P loan vary widely depending on the platform you use. Some lenders may check your credit score, education and work history, among other factors, to determine your eligibility for the loan and the interest rate.

Pros

  • 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 low credit score.
  • Some P2P loans give borrowers the flexibility to delay a payment without incurring extra fees.

Cons

  • There’s no guarantee that your loan will get funded on some platforms.
  • You may need to pay an origination fee.

4. Salary advance

Your future paycheck might be available to use on an unplanned expense today if you have steady employment. According to a 2018 report from the Society for Human Resource Management, 17% of companies have payroll advance programs in place to help employees cover financial emergencies. Other businesses may front employees a paycheck on a case-by-case basis.

“If you’re thinking of asking for a salary advance, don’t go to an employer empty-handed. Put together a spending plan that explains how you’re going to pay off the debt,” said Christensen.

Many employers don’t charge fees or interest on paycheck advances, he added. However, some may charge an administration fee or interest if they use a third-party lender to offer the service. You will be required to repay the loan in installments, either through direct payments or deductions from future paychecks.

Pros

  • 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.

Cons

  • 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.

5. Small business loan

Need cash to cover costs of your business? While you could use a personal loan, a small business loan might make more sense. Lenders will generally take a look at your credit history, business plan, balance sheet, cash flow history and projections, resource management and other factors to determine your eligibility and interest rate.

While many small business loans do require collateral, some lenders offer unsecured business lines of credit that don’t put your assets on the line.

Pros

  • Business loans tend to have lower interest rates (on average) than personal loans.
  • Taking out a business loan can help keep your personal finances separate from your business expenses.

Cons

  • New companies might have a harder time qualifying for a small business loan.
  • Borrowers may need to complete lengthy paperwork.

When it comes to borrowing money, everyone has different needs. Comparing personal loans and their alternatives can help you find the right financial solution for your needs and goals.

 

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