It’s not always easy to qualify for a personal loan. Fortunately, though, there are plenty of other ways to find the funding you need. With that in mind, here are seven personal loan alternatives to consider next time you’re looking to borrow money. Read them over to find the financing option that best suits your needs.
Personal loans can be a useful way to finance large purchases or cover emergency costs. But qualifying for one isn’t always easy especially if your credit isn’t great. The good news is that personal loans aren’t your only option for getting access to funds. Here are 7 smart alternatives to consider when you need cash but don’t qualify for a personal loan.
Credit Cards
Credit cards are one of the most convenient and accessible sources of financing available. As long as you pay your bill on time each month, you can avoid paying interest and enjoy perks like cash back rewards or travel miles. Even if you need to carry a balance introductory 0% APR offers can give you over a year to pay it off interest-free.
The main downside is that standard credit card interest rates tend to be higher than personal loan rates. But used responsibly, credit cards give you ongoing access to revolving credit that can supplement your cash flow as needed.
Home Equity Loans and Lines of Credit
If you’re a homeowner with equity, tapping into it can provide affordable financing for large projects and expenses. The most common home equity products are HELOCs and home equity loans.
HELOCs function like credit cards, giving you ongoing access to borrowed funds up to a set limit. Meanwhile, home equity loans provide a lump sum of cash upfront that you repay in installments. In both cases, your home acts as collateral, allowing lenders to offer lower interest rates than other financing options.
Just keep in mind, failure to repay a home equity loan or line could put your home at risk of foreclosure. Make sure you can comfortably manage the payments before borrowing.
Cash-Out Mortgage Refinancing
Another option for homeowners is refinancing your mortgage and taking some equity out in cash. This combines refinancing to a lower rate with a lump sum payment you can use for any purpose.
As with home equity loans, your new mortgage balance will be higher, raising your monthly payments. But if you have significant equity, need a large amount of cash, and want to lower your rate, a cash-out refi can make sense.
Peer to Peer Lending
Peer to peer lending platforms like Prosper and LendingClub connect individual investors with borrowers. Often they offer more flexible eligibility requirements than banks, making it easier to qualify if you have bad credit.
On the flip side, investor demand determines your loan options and rates. And it can take weeks to get funded as investors review your listing. But for borrowers with limited alternatives, P2P loans are worth considering.
Personal Lines of Credit
Personal lines of credit work much like credit cards, giving you revolving access to borrowed funds. But you’ll typically pay much lower interest rates, often similar to personal loan rates. This makes personal lines a flexible, affordable way to access cash as needed.
Qualifying standards tend to be high, with good credit required for approval. And you may face fees like annual maintenance charges. But for borrowers who qualify, personal lines deliver the flexibility of a credit card with the rates of an installment loan.
401(k) Loans
If your employer’s retirement plan allows it, borrowing from your 401(k) can provide access to cash without needing to meet credit requirements. These loans don’t require a credit check or proof of ability to repay. As long as you remain with your employer, you get up to 5 years to repay the loan.
On the other hand, if you leave your job, the loan comes due immediately. And you’ll face taxes and penalties on any amount you can’t repay quickly. So this option comes with risks, especially if there’s a chance you may change employers soon.
Payroll Advances
Some employers offer payroll advance programs allowing access to wages you’ve already earned before payday. This requires no credit check, and when run internally often comes at no cost. Even third party services like Earnin often provide fee-free payroll advances if you tip within the app.
The downside is that you’re borrowing from future paychecks, which will be smaller until the advance is repaid. So make sure you budget accordingly if going this route. But as an emergency funding option, it can be one of the most affordable.
When to Avoid Alternatives and Improve Your Credit Instead
While the options above can provide accessible financing, some come at a very high cost. Payday loans, auto title loans, and cash advances often charge interest rates over 300%. And it’s easy to get stuck repaying them for months or years.
If your only options are predatory lending or wildly high interest rates, improving your credit first may be the smartest financial move. Paying down balances, disputing errors on your reports, or becoming an authorized user on a friend/family member’s account are just some tactics that can potentially give your score a quick boost.
Building a FICO above 640 at minimum unlocks much more affordable installment loan options worth the wait. And honing your credit skills by responsibly managing new accounts will pay dividends for life.
Choosing the Best Personal Loan Alternative For You
When weighing alternatives, consider factors like:
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Cost – Look for low or no interest options like 0% credit cards, 401(k) loans, or payroll advances first. Then explore affordable installment loans before resorting to high interest products.
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Qualifying requirements – Options like 401(k) loans, payroll advances, and sometimes P2P loans offer easier approval for those who won’t qualify for personal loans.
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Use of funds – Credit cards or personal lines offer revolving credit that can be used as needed. Home equity loans/lines and refinances provide lump sums best suited for big projects.
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Repayment term – Is it a single payment like payroll advances? Installments over months/years like a P2P loan? Or ongoing credit like a HELOC? Pick the repayment setup that best matches your needs.
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Risks – Be aware of potential downsides like foreclosure risks with home equity products or 401(k) withdrawal penalties if you leave your job.
No single alternative is right for everyone. But exploring all your options makes finding the right fit much more likely. And taking the time to build your credit and financial health opens doors to even more affordable financing when you need it.
Small business loan
For the most part, small business loans function fairly similarly to personal loans. Once your application is approved, the money is distributed in a lump sum payment. Then, you’ll be expected to repay the funds through a series of recurring fixed payments. The biggest differences between the two products involve how the funds are used and the application process.
As you might be able to guess, personal loans are meant to cover personal expenses, such as debt consolidation, medical costs or wedding expenses. Meanwhile, business loans are strictly used to cover business expenses, like rent and utilities, inventory or administrative costs.
In general, qualifying for a personal loan involves letting a lender evaluate your creditworthiness, as well as other financial metrics like your debt-to-income ratio. But, you typically won’t need to submit a ton of supplemental documentation in order to be approved.
Business lenders also review those details. However, in addition, they like to see proof that your business is doing well enough to repay the loan. You’ll typically be asked to provide copies of your business tax returns, copies of recent financial and accounting statements and a current business plan alongside your application.
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Choosing business financing allows you to keep your personal and business finances separate. Some lenders can provide funding as soon as the same business day. Government-backed business loans are available through the Small Business Administration (SBA). |
Many lenders charge origination fees. You’ll have to provide documentation describing the health of your business during the application process. Newer businesses may have a harder time qualifying for business loans from traditional sources. |
If you need to cover a business expense rather than a personal one, a small business loan is likely going to be your best bet. Many personal loan lenders won’t allow you to use their financing to cover business costs.
Home equity loan or home equity line of credit
Like a personal loan, the funds from a home equity loan are given to you in one lump sum payment. You’ll then repay the amount that you’ve borrowed through a series of regular installment payments. Meanwhile, as the name suggests, a HELOC functions more like a personal line of credit. You can draw funds from it as needed and pay them back on your own timeframe, as long as you’re meeting your minimum payment.
The biggest difference is that both of these loan products use your home as collateral to secure the loan. That collateral requirement is what allows lenders to offer much lower interest rates for home equity loans and HELOCs than other loan products. However, it also means that the lender has the right to repossess your home if you default on the loan.
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You’ll likely be given a lower interest rate than you would with a personal loan or credit card. Your interest may be tax deductible if you use the funds for home improvements. You can decide whether you’d like to receive the funds as a lump sum payment or have continued access to revolving credit. |
The lender can foreclose on your home if you stop making payments on your loan. Like a personal line of credit, some HELOCs come with added fees, such as maintenance fees. Your HELOC’s credit limit could drop if home values decline significantly in your area. |
A home equity loan or HELOC may be right for you if you are a homeowner who has built up a lot of home equity in your property over the years. This is especially true if you are confident in your ability to repay the loan. That said, if you’re worried you may risk defaulting on your payments, it’s likely not worth risking foreclosure.
At its core, a retirement loan, or 401(k) loan, is a financing method that allows you to borrow from your retirement plan and repay it with interest over a set period of time. Typically, you’ll be given five years to repay the borrowed amount in full, provided that you’re still working for the company during that time.
If you leave the company, the rules are a bit different. At that point, you’ll have 60 days to repay the loan in full. Any amount that isn’t repaid in time will be taxed as an early withdrawal from your account.
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You get to keep any interest that you pay on the loan. Late or missing payments won’t be reported to the credit bureaus. Unlike a 401(k) withdrawal, you won’t automatically be taxed on your loan funds. |
Not all employers allow retirement loans. If you leave the company, your repayment window will be much shorter. If you fail to repay the loan in time, you’ll be taxed on a 401(k) withdrawal. |
If you plan to stay at your company for the foreseeable future and you have a decent amount of funds built up in your retirement account, a 401(k) loan might be a decent option for you. However, if you plan to leave the company in the near future, it may not be worth the risk of either having to scramble to repay the loan or getting taxed on a withdrawal.
Traditional salary advances are a form of short-term loan offered by your employer, either through a dedicated payroll advance program or by being granted on a case-by-case basis. As the name suggests, this financing method allows you to take a loan against your future earned wages. While individual employers generally don’t charge fees or interest for this service, that may still be the case if your employer uses a third-party provider to facilitate the transaction.
It’s also important to note that not all employers offer this service. Even if yours does not, though, it’s still possible for you to access a salary advance. These days, there are plenty of paycheck advance apps out there to choose from. But, be aware that since these apps are provided by outside lenders, they’ll each have their own eligibility criteria and fee structure.
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Salary advances provide access to fast funding. You can usually be approved for a salary advance even if you have poor credit. If the salary advance is offered directly through your employer, you usually won’t be charged any fees or interest. |
You’re borrowing against your future wages, which means your next few paychecks may be lower than usual. Not all employers offer this service. You may have to reveal details about your financial situation to your employer. |
Salary advances can be a good option if you need emergency funding and you’re unable to get a loan from another source. They’re usually a much more affordable option than taking out a payday loan or cash advance. Still, since you’re borrowing against future wages, you’ll have to plan for your next few paychecks to be smaller than usual.
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