Personal Loan Alternatives: 7 Additional Financing Methods to Consider
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.
| 1. Credit card | A line of credit that you can borrow from on an ongoing basis, up to a pre-set limit | Those who want to borrow money as needed and who can afford to pay off their balance in full each month |
| 2. Personal line of credit | Another line of credit that lets you draw money as needed. May offer better interest rates than a credit card | Those who need flexible funding and have a decent credit score |
| 3. Peer-to-peer loan | A loan funded by investors rather than a single financial institution | Those who may not be able to qualify for more traditional forms of financing |
| 4. Home equity loan or home equity line of credit (HELOC) | A form of funding that uses your home as collateral and, as a result, is able to offer better interest rates | Homeowners who have a decent amount of equity in their property and are confident in their ability to repay the loan |
| 5. Retirement loan | A loan that allows you to borrow from your retirement account rather than from a lender | Those who plan to stay at their company while they repay the loan |
| 6. Salary advance | A loan that is made against your future wages | Those who need emergency funding and may not be able to qualify for financing elsewhere |
| 7. Small business loan | A loan meant to cover business expenses | Business owners who need help covering business-related costs |
7 personal loan alternatives
1. Credit card
Main benefit
Unlike personal loans, which give you access to the full loan amount in one lump sum payment, credit cards allow you to borrow money as needed, up to a pre-set credit limit. Additionally, rather than having a set monthly payment amount, you’ll have the freedom to pay down as much of your balance as you would like, provided that you at least cover your minimum monthly payment.
In exchange for that flexibility, credit cards often come with higher interest rates than personal loans, but there are ways to get around them. For example, 0% APR credit cards offer you an introductory rate period where you can maintain a balance without accruing interest, as long as you pay off the balance in full before that period ends. However, these cards are typically only available to borrowers with good or excellent credit scores.
If your credit score is on the lower end, you may want to consider applying for a secured credit card instead. These cards require you to make a deposit when opening your account, and that amount functions as your credit limit. The deposit makes them much easier to qualify for than other cards. They can be a smart way to build your credit history before applying for a more standard option.
Some cards come with a 0% introductory rate period, which can help you avoid paying interest charges. If you pay off your balance in full each month, you can avoid paying interest charges altogether. Some cards offer rewards programs, which can give you access to travel miles or cash back on your statement. | Credit cards typically have higher interest rates than personal loans. Some credit card companies may cancel your introductory rate period if you make a late payment. Having access to revolving credit can make it easier to take on more debt. |
Is a credit card right for you?
Credit cards can be a handy alternative to personal loans if you have ongoing expenses that you need to cover, rather than a one-time purchase. If you have a decent credit score, using a credit card can also help you access perks, like cash-back and travel rewards.
For more information, compare a personal loan versus a credit card.
2. Personal line of credit
Main benefit
For the most part, a personal line of credit functions similarly to a credit card. You can continuously borrow against it, up to a set credit limit. Plus, you have the flexibility to pay down your balance on your schedule, as long as you meet or exceed your minimum monthly payment amount.
The biggest difference between a personal line of credit and a credit card is the interest rate. Personal lines of credit tend to have much more affordable rates attached to them.
However, at the same time, they also come with a few added fees not charged by credit card companies. For instance, it’s common for these lenders to charge a regular maintenance fee to keep the account open. They may also impose a minimum draw amount each time you use the line.
Personal lines of credit offer lower interest rates than credit cards. You can use the line of credit on multiple occasions without needing to apply for a new loan each time. They typically don’t come with the same use restrictions that are common with personal loans. | Personal lines of credit may come with added fees or minimum draw requirements. They don’t allow for the same rewards that are common with credit cards. Continual borrowing from a personal line of credit can contribute to building up unnecessary debt. |
Is a personal line of credit right for you?
Personal lines of credit are a great option if you want the interest rate of a personal loan but don’t know exactly how much you’ll need to borrow. Their flexibility makes them a solid choice for things like home improvement financing, where the end costs are difficult to estimate.
Still, since these products typically require borrowers to have decent credit, you may be better off looking into alternative options if your score is lower.
For more information, compare a personal loan versus a personal line of credit.
3. Peer-to-peer loan
Main benefit
Historically, P2P lending platforms like LendingClub or Prosper connected borrowers with individual investors who were willing to fund their loans. These days, however, most of the investors are corporate entities.
Still, since multiple investors — each with their own eligibility criteria — have the chance to review a borrower’s loan application, qualifying for a P2P loan is often easier than qualifying for a traditional personal loan.
P2P loans often have more lenient qualifying requirements than traditional lenders. These loans may not have the same use restrictions as personal loans. In some cases, you may find loans with fewer fees than your average personal loan. | P2P lending platforms tend to have longer funding times than many other lenders. When there are loan fees attached, they may be higher than what you might expect from a more traditional lender. Not all states allow for P2P lending, so this form of financing may not be an option for everyone. |
Is a peer-to-peer loan right for you?
P2P lending can be a good option for those who may have a hard time qualifying for a loan elsewhere. At the same time, though, you may have to wait longer to receive your funds. After all, you’ll need to wait until you’ve been matched with an investor who’s willing to accept your application. Some investors may also charge high fees.
4. Home equity loan or home equity line of credit
Main benefit
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.
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. |
Is a home equity loan or HELOC right for you?
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.
For more information, compare a personal loan versus a home equity loan.
5. Retirement loan
Main benefit
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.
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. |
Is a retirement loan right for you?
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.
6. Salary advance
Main benefit
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.
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. |
Is a salary advance right for you?
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.
7. Small business loan
Main benefit
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.
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. |
Is a small business loan right for you?
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.
When to choose a personal loan alternative
If you can’t qualify for a personal loan, it obviously makes sense to look into alternative financing methods. Often, you need a decent credit score and debt-to-income ratio to be approved for a loan, which means borrowers with a shaky financial history may want to look elsewhere.
Beyond that, personal loans are generally meant to fund larger, one-time expenses. If you don’t have a clear idea of how you’d like to use the funds or you need ongoing access to financing, you may be better served with a different financial product.
Frequently asked questions
If you can’t get approved for a loan with a traditional lender, there are other options. Peer-to-peer lending, retirement loans and salary advances, for example, can be great options for accessing the funding you need. They often offer more lenient eligibility criteria or don’t require you to meet any specific criteria at all.
Cash advances and payday loans may give you access to fast funding when you need it most, but these products often come with exorbitantly high interest rates, making it all too easy to get trapped in a debt cycle.
Bad credit loans do exist. However, be aware that you’ll often pay more for the privilege of borrowing. Whenever possible, it makes sense to try and improve your score before borrowing in order to secure the best rate.