Top 3 alternatives to installment loans

Installment loans are a popular form of borrowing because they provide a lump sum and a straightforward repayment. But they’re not the right choice for everyone.

Non-installment loans — including revolving lines of credit — could be a better option if you prefer drawing on funds as needed. They might also be more appealing if, in the case of credit cards, you can repay your balance before interest charges are applied.

When to consider an alternative to installment loans

There are two main times to consider financing that isn’t in a lump sum. If one or the other — or both — apply to you, it may be worth looking into alternatives.

You don’t have the best credit (or a co-applicant)

Installment loans from reputable financial institutions require that you have at least good credit and meet an annual income requirement. While some lenders offer bad credit loans, they typically carry higher interest rates and fees. So, if you’re unable to make your monthly payments your credit will suffer and your balance could balloon.

You’re financing an ongoing or unpredictable expense

You can only borrow up to a specific amount with an installment loan. If you over-borrow, you could return the excess funds — but it’s not so simple if you under-borrow. You might seek a second loan to cover the shortfall, but that would require restarting the loan application process.

1. Credit cards

Credit cards can be a great alternative to installment loans if you practice responsible usage and make timely repayments. You can access funds up to your card’s limit, repay only what you borrow and potentially avoid interest charges by zeroing your balance each month.

On the flip side, only making the minimum payment isn’t recommended as a long-term solution: It will cause your monthly payments to skyrocket — and increase your credit utilization ratio, which will in turn lower your credit score.

Before considering this non-installment loan option, create a realistic credit card budget to avoid overspending. Cards’ high interest rates often only become an issue if you fail to pay off your debt at the end of your billing period. A good rule of thumb: If you can’t zero the balance on a card, avoid the plastic in your wallet altogether.

2. Personal lines of credit

Not every lender offers personal lines of credit — especially if you’re looking for an unsecured option. Despite this, they’re a worthwhile alternative to a personal loan.

Lines of credit offer more flexibility and often have an APR similar to installment loan rates. A line of credit operates as half credit card, half installment loan:

• Like a credit card: During the draw period, borrow what you need, when you need it — up to your credit limit — and make interest-only payments each month.
• Like a loan: When your draw period ends, you begin full, principal-and-interest repayment on the amount you borrowed, typically in monthly installments.

Though a line of credit might be more flexible than an installment loan, it could be less accessible and riskier overall. Keep in mind that defaulting on any credit line will damage your credit score, and defaulting on a secured credit line, the lender can seize your collateral.

3. Home equity lines of credit

A home equity line of credit (HELOC) could be a wise option if you’ve built up equity in your home and need to cover major expenses, such as property renovations or college tuition.

The amount you can borrow depends, in part, on the equity you have in your home, although most lenders allow you to access up to 85 percent. Much like lines of credit, HELOCs enable you to withdraw what you need during the draw period, which generally lasts five to 10 years.

If HELOC repayment goes awry, the foreclosure process isn’t immediate, and lenders may be willing to negotiate or extend alternate payment plans. Even so, using your home as collateral always comes with risk.

If you like the idea of a secured credit line but are wary of making your home vulnerable, a personal credit line could be a better fit.

What’s your next step?

Budgeting and saving is, of course, the best non-installment loan option, but if your funding needs are urgent, you might not be able to wait. In that case, proceed cautiously with credit cards and credit lines. They can be helpful or harmful, depending on how you use them.

If you decide to borrow a non-installment loan option, start by casting a wide net. Consider banks, credit unions and online lenders, including your current financial institutions. Then, prioritize lenders that offer prequalification, or the ability to confirm your eligibility and review potential rates and terms without a hard credit inquiry.

Like with all financial products, it will take some effort to land the best option for your situation.