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Whether you’re planning a large purchase or need to restructure your finances, your first instinct may be to arrange a personal loan. These are unsecured loans, which have a set interest rate and set monthly payments for a designated period.
However, since the loans are unsecured, they are not readily available to everyone. If you have a less than ideal credit score, you may struggle to qualify. In some cases, with a sub optimal credit score, you may be able to obtain a personal loan, but the rate is high. This may make it financially unsound to take on such a debt.
Even if you have a good credit score, there are occasions when a personal loan is not the right choice. It could be that you only want the funds for a short time or you need a large sum for home improvements, in which case, there may be lending products that are better suited to your needs and circumstances.
If you’re unsure if a personal loan is the right choice for you, read on as we explore the best alternatives to personal loans in more detail to help you to make an informed decision about your financial future.
1. Credit Card
The credit card is the most obvious alternative to a personal loan as there are a wide variety of card options for all types of credit. You can use your credit card to make a purchase or take a cash advance and you will start paying interest on the amount if you don’t clear the balance during your billing cycle.
As with personal loans, the terms for credit cards can vary greatly. If you have excellent credit, you’re likely to find cards with attractive rates and possibly even cash back rewards for your purchases. On the other hand, those with poor credit may be stuck with high rates, and minimal card benefits.
In some cases, your only option may be a secured credit card where you need to provide a deposit, which will determine your card credit limit. In this scenario, a secured credit card is not an alternative to a personal loan, since you’ll need funds to provide the deposit.
Providing you make the minimum due payment each month, you can decide how much or how little you want to pay off every month.
As we mentioned above, there are reward credit cards that offer cash back or other rewards according to how much you spend on your card.
Many credit cards have a 0% APR for an introductory period. This means that if you make a large purchase or transfer a balance, you’ll be able to pay it down without incurring interest fees.
If you only need the funds for a short time and will be able to pay it back quickly, a credit card can provide one of the cheapest solutions. This is particularly true if you can clear the card balance when the bill arrives, as you’ll pay no interest.
Credit cards typically have higher interest rates compared to personal loans, even if you have good or excellent credit.
If you simply make the minimum payment each month, it could take months or years to clear the card balance, as the bulk of your payment will be to cover the interest charges.
If you’re struggling to qualify for a personal loan, you are also likely to have difficulty getting approved for a credit card. If you have very poor credit, your only option may be a secured card, which is not a personal loan alternative.
2. Personal Line of Credit
Personal lines of credit are similar to credit cards, as there is no set payment schedule for the debt. You can use the credit line as and when you need it. However, personal lines of credit interest rates are typically lower compared to credit cards.
A key difference between personal lines of credit and personal loans or credit cards is that the lender may charge additional fees. It is quite common to incur a monthly or annual fee to maintain your line of credit. Additionally, there are no rewards for having an account, as you tend to get with credit cards.
A personal line of credit is best suited to those who want provision to cover unexpected financial emergencies. However, if you’re planning a purchase, it may not offer the most attractive interest rates.
Although the lender sets your credit limit for your personal line of credit, you don’t need to use your entire limit at one time. You can simply call down the funds you need as and when you need them.
A personal line of credit can be a good option if you have an inconsistent income and may experience times when you need a little extra cash that you can repay later.
Unlike some personal loans, you can use your personal line of credit for practically any purpose. Most lenders don’t apply any spending restrictions for the funds.
Even if you don’t use the personal line of credit, you may incur a monthly or annual fee simply for having the facility available to you.
Since there is more flexibility, there is also the potential for getting into financial difficulties. The open credit line could be tempting to spend more than you planned.
Typically, personal lines of credit are only available to those with good or excellent credit. You may also struggle to qualify if you only have a short credit history.
3. Peer to Peer Loan
Peer to peer loans are a lot like personal loans, but instead of being funded by a bank or lending institution, they are funded by individual investors. P2P loans are becoming more commonplace and there are a number of lending marketplaces that allow smaller investors to make some returns on their cash and help borrowers access the funds they need.
The lending marketplace determines the initial loan approval before the eligible candidate’s application is put into the marketplace. Potential investors can then review the application to decide if they want to help fund the loan.
Since the application is reviewed by individuals, there is a chance that they may be more willing to overlook any issues in your credit history or consider unconventional signs of the applicant’s creditworthiness. This could make it a more flexible option compared to a personal loan from a traditional lender.
It is possible to access funds quite quickly. Some P2P platforms can offer the loan money in just one business day after loan approval.
Unlike traditional banks or lending institutions, P2P platforms tend to have more flexible lending criteria. So, even if you have a lower credit score, you may still qualify.
Some platforms allow payment delays without incurring additional fees. However, this can vary from loan to loan, and platform to platform.
Even if the lending platform decides to proceed with your application, there are no guarantees that investors will fund your loan.
Many P2P platforms charge an origination fee for loans. This means that you would need to pay a fee of 1% to 8% of your loan amount to get your funds.
While it may be quite quick to get your funds upon approval, you may need to wait far longer as your application is reviewed by the platform and potential investors.
4. Home Equity Loan or Line of Credit
This is similar to a personal line of credit, as with personal lines of credit, you can call down funds up to your agreed limit as needed. However, there is one crucial difference, the finance is secured by your home. Essentially, your home acts as collateral. Should you default on the debt, the lender has a claim on your home to recoup the loss.
Home equity loans are also similar to lines of credit, but essentially, it is a loan based on the amount of equity you have in your property. For example, if your home has a value of $300,000 and your mortgage is $150,000, you have $150,000 of equity.
Home equity loans or lines of credit are a good option if you need to finance a larger sum. Since the debt is secured on your property, there is less risk for the lender and therefore, the rates tend to be lower. This means that you can pay off the debt over a longer period to keep your monthly repayments as low as possible, if necessary.
This means that if you have a large amount of equity in your home, you can potentially access a large loan.
Since the finance is secured on your home, there is less risk for the lender. This is reflected in the rates offered, which tend to be far lower than a conventional personal loan.
Most home equity loan lenders allow the funds to be used for practically any purpose. So, whether you want to use the funds for home improvements, debt consolidation, medical expenses, or other reasons, you should have no difficulties.
Your home is used as security for your funds. This means that it is at risk if you fail to repay the debt.
You will also need to consider that many home equity loans and home lines of credit have closing costs. So, you will need to pay a percentage of the loan amount in fees.
Since these forms of borrowing rely on your home’s value, the application process will involve an appraisal, which can cause delays.
5. 401K Loan
A 401k loan will allow you to borrow against the funds in your employer sponsored retirement plan. Unlike a conventional personal loan, you won’t need to submit an application and the supporting documentation to qualify for the loan.
Additionally, there are no minimum credit score requirements. This makes a 401k loan a good option if you would struggle to meet the loan requirements for a traditional lender.
However, these loans are not perfect. For example, you’ll need to pay tax twice on the funds used to repay your loan. Firstly, you’ll need to make the money, which will be subject to income tax. Then when you withdraw the funds down the line, you’ll pay income tax a second time.
Additionally, if you leave your current employer when the loan is still active, if you don’t repay the full amount within 90 days, you’ll pay additional taxes as it will become a taxable distribution.
Unlike many forms of loans, the application process for a 401k loan is very quick and simple. In many cases, it can be done completely online.
Even if you have poor credit, you can still access this type of borrowing.
Rather than paying interest to a lender, the interest you pay on what you borrow with a 401k loan goes back into your retirement account.
Not all plan providers allow 401k loans for their employees. So, you will need to check if this is possible with your 401k plan.
You will be taxed twice on the interest for the amount you borrow.
There is a potential to lose the earnings you could have made if you had left the money in your 401k account.
Your potential loan amount will be determined by your fund and plan, so you may not be able to borrow as much as you wanted.
6. Life Insurance Borrowing
While a conventional personal loan typically requires a full credit check and comprehensive application process, life insurance loans work differently. You can typically borrow up to the cash value amount you’ve accumulated, with the policy serving as your collateral.
Generally, the repayment terms are flexible and depending on your insurer, you may not even need to make payments towards your loan. In this case, when you die, your insurer simply deducts the outstanding loan balance from the benefit amount of your policy.
Many insurers allow you to take out new loans providing you continue paying your premiums. However, you do need to take care not to overextend your policy, creating negative equity.
Unlike many forms of borrowing, you won’t need to pass a credit check or prove your income to qualify for a life insurance loan.
Depending on how long you’ve had the policy, you may be able to borrow more than traditional lenders would offer.
Since the loan is secured on your policy, the lenders typically offer quite attractive rates, particularly compared to bank loans or credit cards.
Most of us take out life insurance to provide financial protection for our loved ones after our deaths.
However, if you use life insurance borrowing, it can have a significant impact on the funds provided to your beneficiaries.
While the rates may be low, the interest can compound particularly quickly. If you don’t add additional funds to cover what you’ve borrowed, the interest can accrue beyond the value of your policy. If this occurs, your policy will lapse and you may need to surrender it to the insurer.
There are also potential tax implications. While the funds you borrow will not be treated as income, the loan will become a taxable event should you be forced to surrender the policy.
7. Mortgage Refinance
While this may appear similar to a home equity loan, a mortgage refinance requires that you roll up your existing mortgage into a new loan. Your loan amount will still be determined by the equity you have in your home, but rather than managing a mortgage payment and a loan payment, you’ll have just the one.
As with a home equity loan, a mortgage refinance will be secured on your home. So, if you default on your scheduled repayments, your home is at risk. Another similarity is that your application process tends to be quite involved, since a home appraisal will be required.
However, a mortgage refinance is a good option if you’re looking to finance a large purchase or bill. Since the loan is secured on your property, the rates are typically quite low. But, you do need to think about the long term costs, as the loan term is usually 15 years plus. So, while the rates may be low, spreading the cost over this long will accrue far more interest costs.
You can restructure your finances and access the funds you need without needing to manage multiple payments. Instead, you’ll continue to pay one monthly payment that covers the loan funds and your mortgage.
Since the loan is secured on your home, you can secure a deal with low rates, particularly if you have good or excellent credit.
The loan amount will be determined by your home equity. So, if you have lots of equity in your home, you could borrow far more than with a conventional personal loan.
As with home equity loans, since mortgage refinancing is based on your home’s value, the application process is a little long winded. You’ll need to submit proof of income and have your home appraised, which can delay the approval.
Mortgage refinancing is a long term loan, so you need to be aware of the compounded interest. You may end up paying more in interest costs, despite the lower rate compared to taking on a short term personal loan.
Your home will act as the collateral for your loan, so it is at risk if you fail to maintain the repayment schedule.
8. Credit Unions
Credit unions are an alternate lending institution. They provide basic banking services, and many credit unions also offer loans and mortgages. The advantage of a credit union is that the members' funds are used to provide lending for other members.
This may seem like peer to peer lending, but the loan applications are not reviewed by the members. Instead, the credit union team reviews your application and determines if you qualify.
Membership to credit unions tends to be limited to exclusive groups. For example, you may need to work in a specific industry or live in a particular geographical area.
However, once you’re a member, you can save money in your account and the eligibility criteria for loans is usually quite relaxed. This means that if you don’t have good credit or have variable income, you can still get approved, depending on the specific credit union rules.
Each credit union has its own lending criteria, but this tends to be far more relaxed compared to traditional lending institutions. This opens up this type of financing to those with fair or poor credit.
As a member of a credit union, you’ll be part of a finance community. You can save money and your funds can be used to help other members. On the other hand, when you need a loan, other members' funds can be used to help you.
Due to the relaxed lending criteria, credit unions typically have a streamlined approval process. This can allow you to quickly access the funds you need.
You can’t simply source a loan from a credit union without becoming a member. Although many credit unions will organize your membership when you apply for a loan, this could be a barrier for some.
Credit unions are not open to everyone. Depending on the specific credit union, you may need to live in a particular area or work in a specific industry.
Although the lending criteria are more relaxed, there are some limitations to the loan amounts. For example, some credit unions only allow you to borrow three times your savings account balance. So, if you are looking for a specific loan amount, you may not be able to access that level of funding.
As we’ve demonstrated, there are some excellent alternatives to personal loans. If you are in need of funds and are not sure if a personal loan is the right choice, it is important to explore other options.
Consider what funds you need and how long you will need to repay the loan, which will help you to determine which type of finance is the best option for you.
With a credit score of 550, you might be able to get a personal loan, but it will be difficult. You may also receive only loan offers with high interest rates and unfavorable repayment terms.
If you are unable to obtain the loan you require, you may want to consider spending a few months attempting to raise your credit score by lowering your credit card utilization and debt-to-income ratio.
This is determined by the type of loan and the lender. Borrowing from a fair credit borrower increases your chances of getting the funding you require because these lenders specialize in providing funding to people with poor credit.
You may also have a better chance of getting a personal loan from a credit union or an online lender. Because of the strict bank procedures and borrowing terms, banks are usually stricter on their borrower guidelines and have less room to work with you.
Check with the loan provider to see if they offer pre-qualification offers that include a soft credit pull. Your credit score will not be affected by a soft pull. Most lenders will perform a soft pull before performing a hard pull.
If the loan doesn't want to do a soft pull to see if you pre-qualify, you should look for another lender. You don't want to damage your credit and then be unable to obtain the funding you require.
A personal loan is frequently chosen by someone looking to consolidate debt or finance a large expense, such as a home improvement.
Most personal loans are not secured, and you will receive lower interest rates than you would with a credit card. They will not be suitable for someone looking for funds for discretionary spending, such as medical costs or emergency expenses.
Personal loans are not a good option if you want to buy non-essential items such as a vacation or a flashy wedding. Paying for medical expenses with a personal loan is also not recommended because you can often obtain better repayment terms by using a medical credit card or a payment plan through the medical facility.
Finally, you should avoid using personal loans to cover emergency expenses.
The majority of lenders charge either a flat loan fee or a percentage of your monthly payments. There are a few things you can do to avoid this. Paying your bill by the due date is one simple way to avoid the extra fees.
Some banks and online lenders will also waive the fees if you agree to set up automatic payments for your bills.