If you’ve been denied a personal loan recently or don’t think a personal loan is right for you, you might feel at a loss as to how to cover a large expense or fund a major project.
The good news is, there’s no shortage of personal loan alternatives that suit a variety of situations. Let’s take a closer look.
Credit Card
A credit card offers you a line of credit that can be used for a variety of purchases. You can borrow up to a set credit limit, and each month that you carry a balance, you’ll owe at least the minimum payment. Credit cards are generally seen as a better option for smaller, everyday purchases, while a personal loan may make more sense for larger, more expensive items, such as a house or car.
Using a credit card responsibly can be a good way to establish your credit history, so long as you make timely payments each month. And some cards may come with perks, such as rewards points or travel rewards.
On the downside, if you don’t pay off the full balance of your credit card each month when it’s due, then your balance will accrue interest. (And credit cards typically have higher interest rates than personal loans.) If you continue to make charges on the credit card while only making minimum monthly payments, then it will take you even longer to pay off the balance. To find out how much interest you’ll pay on any balance, you can use a credit card interest calculator.
Applying for one credit card can ding your credit score by just a few points. But applying for multiple cards at once could raise red flags for lenders and can drag down your credit score.
Pros
• Can tap into funds as needed and repay as you go
• Can build credit as long as you make on-time payments
• Some cards come with perks such as rewards points and travel-related benefits
Cons
• Can have higher interest rates than personal loans
• May take you longer to pay off the balance if you only make the minimum payments
• Applying for too many cards at once may hurt your credit
Recommended: Personal Loan vs. Credit Card
Personal Line of Credit
A personal line of credit is a type of revolving credit line that can be used for many different things. Like credit cards, a personal line of credit has a maximum credit limit, and borrowers are required to make a minimum monthly payment. Once the debt is repaid, money can be withdrawn once again. Personal lines of credit may be secured, which require collateral, or unsecured, which do not require collateral.
When comparing a personal line of credit vs. a personal loan, you may discover that a personal line of credit allows you to access money over time instead of all at once. This level of flexibility may reduce interest charges, because you’re only taking out the money you plan on using right away. And generally speaking, the interest rates on a personal line of credit tend to be lower than those on a credit card.
However, it can be difficult to qualify for an unsecured line of credit with a good interest rate, as they’re more risky for the lender. Plus, the flexibility of a line of credit could make it easy for borrowers to take on more debt or take longer to pay off what they owe.
Pros
• Typically has a lower interest rate than credit cards
• Funds can be used for a variety of purposes
• You can access funds as you need them
Cons
• May be difficult to qualify for an unsecured line of credit with a good interest rate
• Can be easy to take on more debt or take longer to pay off the balance
Recommended: Personal Line of Credit vs. Credit Cards
Home Equity Loan
If you’re a homeowner and meet certain requirements, you may have the option to take out a home equity loan. This means you’re essentially borrowing against the equity you’ve built in your home.
Like a personal loan, funds from a home equity loan are disbursed in one lump sum, and you owe monthly payments for the life of the loan. Your home secures the loan, and because of that, lenders tend to offer a lower interest rate than they would on most unsecured loans. Interest rates are usually fixed.
It’s worth noting that repayment begins right away, and if you fall behind on your payments, you risk losing your home. In addition, the loan amount is set, so if you need more money, you’ll need to apply for another loan.
Pros
• Low interest rate
• Can borrow large amounts of money
• Funds can be used for a wide variety of purposes
Cons
• Risk losing your home if you fall behind on payments
• Repayment begins immediately
• Loan amount is set
Home Equity Line of Credit (HELOC)
Like a home equity loan, a home equity line of credit (HELOC) is secured by the equity you’ve built in your home, and your home is used as collateral.
One of the main differences is that a HELOC offers a revolving line of credit, which means you can tap into funds as needed and only pay interest on what you borrow. There are usually low or no closing costs involved with a HELOC, and the interest rate is likely to be variable.
There are some potential drawbacks to keep in mind when comparing HELOCs vs. personal lines of credit. For starters, you may have to pay closing costs on the loan amount, though some HELOCs come with low or zero fees. Your interest rate will likely change with the federal funds rate, which means that over time, your monthly payment amount may fluctuate. Also, if you fail to make payments and the loan goes into default, you risk losing your home.
Pros
• Only borrow what you need
• Lower initial interest rates than unsecured loans
• Repayment terms can be flexible
Cons
• Can lose your home if the loan goes into default
• Variable interest rates
• Can be upside-down on your mortgage (i.e., you owe more on your home than what it’s worth)
Retirement Loan
Also known as a 401(k) loan, a retirement loan is a type of loan where you borrow from your retirement account and pay yourself back over time with interest. You can typically borrow against a 401(k), 403(b), or 457(b) retirement plan.
Per IRS guidelines, you can borrow up to $50,000 or 50% of your account balance, whichever is less. Unless you’re putting the money toward buying your primary residence, you have five years to repay your loan and need to make quarterly payments.
Pros
• Don’t have to go through a lengthy application process
• Doesn’t impact your credit
• Loan repayments are automatically taken out of your paycheck
Cons
• Can’t borrow more than $50,000
• Missing out on compound interest and growing your retirement funds
• If you file for bankruptcy, you’re still on the hook for paying off the loans
Peer-to-Peer Loan
Also known as social lending or crowd lending, a peer-to-peer loan (P2P loan) is a financing model where individuals borrow from others through an online platform. In turn, the financial institution is cut out of the picture, and individuals can borrow from individual investors or lenders.
The main draw for lenders is that they might earn more on the interest than if they put their money in a savings account. Borrowers might be eligible for lower interest rates or less-strict lending criteria. What’s more, the funding process is often quicker than going through a bank — an application may be approved within minutes and funds disbursed within a few business days.
Pros
• Flexibility in how funds can be used
• Speedy funding process
• May qualify with fair credit
Cons
• Often have origination fees (up to 8% of the loan)
• Might have a higher interest rate
• Might have late fees
Salary Advance
If you have an urgent financial need or personal emergency, you might be able to get part of your future paycheck now. In essence, it’s a loan from your employer, with the expectation that you’ll pay it back.
Your company might charge a fee or interest rate to cover the extra paperwork and accounting. However, it could be a solid way to pay for an emergency, provided you know the terms, restrictions, and what a salary advance entails.
Pros
• Easy repayment methods (i.e., funds are automatically deducted from your paycheck)
• Can provide easy, quick access to funds
• Interest rates may be lower than other types of loans
Cons
• Not offered by all employers
• May need to meet eligibility requirements, such as a minimum number of years of employment and no previous paycheck advance requests
• Might get complicated if you leave your job and haven’t repaid the advance
• Smaller-than-usual paychecks could make it more difficult to make ends meet
Mortgage Refinance
A mortgage refinance is when you’re swapping your current mortgage for a new one. There are different reasons why this route might be attractive for you, such as locking in a lower interest rate or a lower monthly payment. With a cash-out refinance, for example, you replace your existing mortgage with a new mortgage for more than the previous balance. You receive the difference in cash.
Pros
• You can receive a tax break if funds are used for home improvements
• Can have relatively lower interest rates than other types of financing
• Can stretch out your repayment period
Cons
• Can risk foreclosure if you aren’t able to keep up with payments
• Will need to pay closing costs
💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.
Small Business Loan
If you plan on using a personal loan for business-related reasons, you might consider a small business loan instead. There’s no shortage of financing for small businesses, and lenders include banks, credit unions, online lenders, P2P platforms, and loans backed by the Small Business Association (SBA).
The requirements, loan amounts, and options might vary widely among lenders and loan types. But in general, lenders will look at your personal credit score, finances, and debt-to-income ratio. You’re also often required to provide a business plan.
Pros
• Longer repayment terms
• Flexible business-related uses
• Typically have better interest rates
Cons
• Slower financing times
• Rigorous documentation requirements
• Might need to provide collateral
The Takeaway
There are pros and cons of personal loans, so if you decide to explore other funding options, rest assured there’s no shortage of personal loan alternatives. Examples run the gamut from home equity loans and HELOCs to personal lines of credit and credit cards and more.
By knowing what’s out there and weighing the advantages and disadvantages of each, you’ll stand a stronger chance of figuring out what is best suited for your needs, preferences, and situation.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
What alternatives to personal loans are the most popular?
The most popular options for personal loans are credit cards, retirement loans, home equity loans, home equity lines of credit (HELOCs), peer-to-peer loans (P2P), and a cash-out refinance.
Each option has its pros and cons and different lending requirements. And each may be better suited for specific borrowers.
Why would you need to use an alternative to a personal loan?
You might need a personal loan alternative if you don’t qualify for a traditional personal loan, or, if, after doing your research, you’ve found that it isn’t the best option for your needs.
Can you use personal loan alternatives even if you have a personal loan?
Yes, you can use personal loan alternatives if you currently have a personal loan. However, if you have multiple loans, it’s important to ensure you can keep up with the payments.
Photo credit: iStock/zamrznutitonovi
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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