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If you are in need of some extra cash, a personal loan may be the solution for you.
However, not everyone has great credit and may not be able to qualify for a personal loan.
This is where alternative loans come in.
In this post, I share with you 14 different alternatives to personal loans that may be a better fit for your needs.
In the end, you will know which type is best for your financial situation and needs.
Table of Contents
14 Alternatives To Personal Loans
Why Consider Different Types Of Loans?
Personal loans are a great way to get money for large purchases.
As long as you have good credit, chances are you can get approved for one that allows you to use the money however you want.
But they aren’t the only option out there.
And depending on the loan amount you need, your credit score, and other factors, there could be better options for you.
This is where this post comes in.
By seeing other options to personal loans, you can save money, build credit, and use the money how you want.
As you go through this list, it is critical that whichever option you choose, you understand if there are prepayment penalties if you decide to pay off the loan early.
While most traditional loans do not charge prepayment penalties, some do and many of the newer alternatives do as well.
Even though you might not think you will pay off the loan early, it is nice to have this option if you do come into a windfall of money.
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#1. Credit Cards
The most common personal loan alternative is credit cards.
You can use your credit card to purchase anything you want and then take your time repaying the debt as there are no repayment terms by a certain date.
You also don’t have fixed monthly payments, other than a low minimum payment amount.
The biggest drawback is the high interest rates credit cards charge.
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For this reason, most people choose to use credit cards for personal spending and take out a traditional loan for larger expenses.
Another issue is with the credit limit.
Most cards have a low credit limit compared to a loan, so you may have a hard time funding very expensive purchases this way.
#2. Credit Card Cash Advance
A cash advance is a feature most cards offer that allows you to get quick access to cash.
These are not intended for larger or longer term loans, mainly because the interest rates cash advances charge is higher than your purchase APR, which is already high.
Because of this, you are better off considering other short term options on this list, or even working to build up a cash account so you don’t need to borrow cash in the event of an emergency.
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#3. Bank Overdraft
Some banks will allow you to overdraft your checking account.
This lending option works by coming to an agreement with your bank or credit union before you actually borrow the money.
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You agree to an amount, the interest rate, and the pay back terms.
Then you can overdraw your bank account, or withdraw more money than you have in your account.
You will be charged interest on this amount as you repay the amount.
The biggest downside to this is you won’t have money in your checking account to pay your monthly bills.
So this option is only ideal for situations where you can repay the lump sum amount quickly and are not going to need to make a monthly payment for an extended period of time.
#4. Personal Line Of Credit
A personal line of credit is very similar to using your credit card.
There is no fixed payoff schedule and you can use the money on the credit line as you need it.
The benefit here is you only pay interest on the money you borrow.
And once you qualify for the credit line, you have it until you close it.
This means you can open this type of loan now, and then access it 15 years from now without an additional review of your credit history.
You could have gone from an excellent credit score to a poor credit score during this time and not have to worry about getting approved.
Another benefit is personal lines of credit has a lower interest rate than credit cards and many of the other loans listed.
The biggest drawback is most banks and credit unions charge a monthly fee or annual fee to keep the account open.
In fact, it is hard to find a financial institution that doesn’t charge this fee.
#5. Buy Now Pay Later
Another option for short term needs instead of a personal loan or cash advance from your credit card is buy now, pay later.
These have become very popular borrowing options and are simply a rebrand of an installment loan.
The advantage with BNPL loans is they only do a soft credit check, and most people, even with decent credit or a low credit score and qualify.
Another advantage is as long as you make payments on time, there is no interest or fees.
But many do charge interest and late fees if you don’t pay on time.
These can be a great short term option as long as you can make timely payments and find one that doesn’t charge interest.
#6. Home Equity Loan
Home equity loans is where you borrow against the equity you have in your house.
This is one of the most popular borrowing options out there.
The interest rates are relatively low, and you have a long time to pay back the debt.
You can also deduct the interest you pay on your income tax return, lowering your borrowing costs even more.
The money you borrow can be used for anything, though most people use it for home improvements or to consolidate debt from higher interest sources, like credit cards.
But there are several drawbacks to this option as well.
First, if you don’t own your home or don’t have equity in it, you can’t qualify for this type of loan.
Second, if you do have equity and you borrow against it, you are putting your home at risk.
If you can’t make the payments, the lender could foreclose on your house.
Third, it can take a long time to get approved.
You will need to have your home appraised and then go through a lengthy application process.
#7. Mortgage Refinance
To lower their monthly mortgage payment, save money on interest, and get access to a lump sum of cash at the same time, some people opt for a mortgage refinance.
As long as you have equity in your home, you can do a cash out refinance, which is a fancy way of saying taking out a larger loan than you have now.
For example, you might have a balance of $150,000 on a $300,000 house.
You can refinance and borrow $200,000.
Of this amount, $150,000 would pay off your old mortgage and the other $50,000 could be used to pay off high interest debt or anything else you wanted.
Even though you are borrowing more money, your monthly payments end up being less because of lower interest rates.
You also get to write off the interest you pay on your taxes since it is mortgage interest.
These factors make it an affordable option compared to personal loans.
The biggest downside is you will have to pay closing costs, which can be thousands of dollars.
The good news here is many people choose to roll these costs into the loan itself so they don’t need the cash on hand.
#8. 401k Loan
A 401k loan is where you borrow money from your retirement account.
The money can be used for anything you want and the interest rate is relatively low.
There is no credit check required in order to get approved since you are borrowing from yourself.
Another bonus is since you are borrowing money from yourself and not other lenders, you pay the interest to yourself, back into your 401k account.
As great as this sounds, know that when you do take out this type of loan, you usually end up with less money saved for retirement than if you left the money in the account and took out a personal loan instead.
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In fact, borrowing from your retirement could be one of the worst financial decisions you make.
I encourage you to consider many of the other options listed here first.
While the loan terms are in your benefit with a 401k plan loan, you can do major harm to your retirement plans if you take one out.
#9. Peer-To-Peer Loan
This option is a twist to the traditional installment loan.
Instead of using a bank, credit union, or online lender to borrow money from, you borrow from other people.
Through crowdfunding, multiple people fund your loan and you pay the borrowed money back on a fixed schedule.
Many people who chose this option have a decent to bad credit score and don’t want to go through the traditional loan process.
In fact, in some cases, the interest rates you get from P2P loans can be lower than many of the other options listed.
#10. Co-Signed Loan
If you have a bad credit score, a personal loan option for you might be to have someone co-sign with you.
Here you get someone with a higher credit score than you to sign the loan agreement with you.
This results in you getting a lower interest rate and possibly even qualifying in the first place.
The catch here is you need to make sure you repay the loan based on the repayment terms.
This is because the co-signer is also liable for the debt.
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So if you stop paying, they can be forced to repay the loan.
If neither of you repays the loan, both of your credit histories will be ruined.
#11. Small Business Loans
If you have a business, you could take out a loan from it to help fund your business expenses.
Understand that this option is just for small business owners and the funds from the loan can’t be used for personal reasons.
The advantage here is they tend to have lower interest rates compared to personal loans.
But the service provider will require a lengthy approval process, including a credit check, and you will need consistent revenue to qualify.
Finally, there could be an origination fee and other costs that are added in, making it more expensive.
#12. Salary Advance
Similar to a payday loan is a salary advance or paycheck advance.
Some employers offer this benefit to employees or use a third party to offer this.
You are simply taking an advance on future paychecks with this option.
Usually there are no fees or interest charged on the loan, and there is no credit check.
However if your employer uses a third party administrator, they may charge an origination fee.
Payback is usually through payroll deductions from your future paychecks.
Finally, the biggest drawback is not many employers offer this benefit to their employees.
#13. Payday Loans
If you employer doesn’t offer a paycheck advance, you can consider a payday loan.
These are short-term loans, normally repayable within a month or less.
The loan is small, usually a fraction of your monthly salary, and has high interest rates.
The amount you owe the lender is deducted from your salary on the next payday.
Due to high interest and short repayment periods, borrowers often find themselves reborrowing after paying off the former loan which keeps them in a cycle of debt.
You should only go for payday loans if you lack an alternative.
#14. Pawn Shop Loan
One of the more popular payday alternative loans is a pawn shop loan.
Unlike most personal loans which are unsecured, pawn shop loans are secured with very high interest rates.
To access this, you use your personal property such as electronics and jewelry as collateral for your loan.
The pawn shop owner sells these valuables to pay for the loan if you fail to repay the amount within the agreed timelines.
The benefit with these loans is since they are secured, there is no credit check.
It doesn’t matter if you have great credit or poor credit since the amount is secured by an asset.
These types of loans, along with payday loans, have sky high interest rates and should only be a last resort.
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In fact, I would encourage you to seek out a loan from a family member before going this route.
What Is The Best Personal Loan Option?
While all of these options have their place, in many cases, a personal loan can still make the most sense.
So where do you find the best personal loans?
I like PersonalLoans.com the best.
They offer many different types of borrowing options, many without an origination fee or other fees, that have a competitive interest rate.
Of course, your credit score will impact the interest rate you are offered, but they are a great source to look into.
There are 14 alternatives to personal loans to consider.
Borrowing money is a big financial decision that will have a major impact on your money going forward.
Because of this, it is important to do your research to find the right product for you and to get a loan amount you can afford to pay back.
The last thing you want is the added stress of being under a mountain of debt that you cannot repay.
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I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.