Personal loans aren’t the right choice for everyone. Perhaps you don’t want to be tied down with a multi-year loan. Or maybe your credit score prevents you from qualifying for a decent interest rate. Bankrate found that online lenders charge interest rates as high as 36% APR. Fortunately, there are plenty of other options when you need to borrow money.
We’ve put together a list of alternatives so you can find one that better meets your needs.
Credit Cards
Credit cards give you immediate access to a line of credit that you can borrow from as needed up to a preset limit. You then pay down the balance as you like, as long as you make the minimum payment.
They charge higher interest rates than loans, but you can avoid accruing interest by paying your balance in full every month.
Pros and Cons
Pros:
- Instant purchasing power
- A line of credit can be paid off and reused
- Can build credit
- May offer rewards and perks
- Can avoid paying interest
Cons:
- Interest rates are high
- Need good to excellent credit for perks
- Risk of overspending
Who is it best for?
Credit cards are best if you need to cover ongoing expenses and can afford to pay your balance in full each month.
Paycheck Advances
A paycheck advance allows you to borrow money you’ve already earned before your official payday without a credit check. You can typically advance between $20 to $750. Individual employers may offer paycheck advances, or you can use a third-party app.
Paycheck advance apps require you to link your bank account and set up direct deposit to determine how much to lend you. Advances are typically repaid out of your next paycheck. They are similar to 1 hour payday loans with no credit check, but tend to be more affordable.
The exact fee structure varies. They may require a subscription, a flat fee, or ask for a tip. Most advances do not charge interest. You can often receive funds for free within one to three business days or pay for instant delivery.
Pros and Cons
Pros:
- No interest or credit check
- Fast access to funds
- Easy approval
- Minimal fees
Cons:
- Often limited to earned wages
- Fees can add up
- Next paycheck will be short
- May lead to a cycle of borrowing
Who is it best for?
Paycheck advances are best for employees with a predictable income who need a small loan to tide them over till payday.
Buy Now, Pay Later (BNPL) Plans
BNPL plans let you split purchases into smaller interest-free installments. You typically have to pay a portion at checkout and then pay the rest over 4 to 6 weeks.
Approval is often fast and requires only a soft credit check or none at all. Plans may charge late fees or interest if you do not pay on time.
Pros and Cons
Pros:
- Fast approval
- Easy to qualify for
- No credit check
- No mandatory interest
Cons:
- Late fees may apply
- Can encourage overspending
- Short payoff period
Who is it best for?
BNPL is best for individuals who want to spread out the payments on a large purchase over a few weeks and avoid interest charges.
Peer-to-Peer (P2P) Lending
P2P lending connects you directly with individual investors. Your approval odds are higher since you’re applying with multiple lenders with varying eligibility criteria. Often, they are more lenient than traditional financial institutions.
P2P loans tend to be installment loans that are repaid over a few years. They may come with more fees and take longer to process.
Pros and Cons
Pros:
- Competitive interest rates
- Easier approval
Cons:
- Credit check and income verification
- Approval and funding may take a few days
- May pay more in fees
Who is it best for?
P2P lending is best for borrowers who don’t qualify for bank loans but still want access to installment loans with reasonable terms.
Home Equity Loan or HELOC
Home equity loans and lines of credit (HELOCs) are forms of funding that use your property as collateral. You borrow against the equity you’ve built to secure larger loans with lower interest rates.
Home equity loans give you a lump sum with fixed monthly payments. HELOCs function like credit cards with revolving limits you can draw from as needed.
Both require a credit check and home appraisal. If you cannot repay, you may lose your home.
Pros and Cons
Pros:
- Lower interest rates
- Interest may be tax-deductible
- Can access large sums of money
- Long repayment period
Cons:
- Risk of foreclosure
- Lengthy approval process
- Need substantial equity
- Closing costs and fees may apply
Who is it best for?
Home equity products are best for homeowners with substantial equity who can afford to repay the loan.
401(k) Loan
A 401(k) loan lets you borrow from your retirement account. The amount is limited to 50% of your vested balance or $50,000, whichever is less. You repay the loan, plus interest, over five years. The interest rates are low, and it is paid back into your account.
The problem with borrowing from your retirement account is that the money you withdraw doesn’t grow. If you do not repay or switch employers before the balance is repaid, the funds may be taxed as an early withdrawal.
Pros and Cons
Pros:
- No credit check
- Low interest rates
- Interest is returned to you
Cons:
- Reduce retirement savings
- Must repay quickly if you leave your job
- Taxes and penalties if not repaid on time
Who is it best for?
Consider a 401(k) loan only if you’re not planning on retiring or switching jobs soon and can repay the money fast.
Final Thoughts
Personal loans are not always the right choice. They are best suited for borrowers with good credit who have a large, one-time expense.
If you don’t know how much you need or want ongoing access to funds, a revolving line of credit could be the ticket. If you have poor credit, then look for alternatives that don’t consider your score. There are plenty of ways to borrow.
