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.

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.

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.

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.

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.

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.

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.

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.

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.