10 alternatives to personal loans and who they’re for
Key takeaways
- Alternative personal loan options include credit cards, home equity loans and buy now, pay later plans.
- Each alternative has benefits and drawbacks to consider.
- The right alternative depends on how much money you need, how quickly you need it and how flexible you need the terms to be.
If you’ve checked out the pros and cons of personal loans and they don’t meet your needs, it’s worth it to investigate other options. A credit card, home equity line of credit (HELOC) or personal line of credit might make more sense for funds you don’t need right away or projects that don’t have a final cost. If you don’t have enough cash to pay for something but don’t want a multi-year loan, buy now, pay later plans may be available.
We’ve gathered 10 alternatives to personal loans that may be a better match for your budget, spending plans or payment flexibility needs.
10 personal loan alternatives
| Personal loan alternative | When it’s a better choice than a personal loan |
|---|---|
| Credit card | You don’t need all your funds immediately. You prefer the flexibility of minimum payments. You want to be able to reuse the funds as needed. |
| Home equity loan | You own a home with substantial home equity. You prefer a fixed, stable payment. You need a longer repayment term |
| Home equity line of credit | You don’t want to use credit cards. You have substantial equity in your home. You don’t want all the credit at once. You have ongoing projects that require reusable funds. |
| Cash-out refinance | You can’t qualify for a good personal loan rate. Your credit scores are too low for home equity financing. You have significant equity in your home. |
| Personal line of credit | You don’t need all the funds now. You don’t mind a variable rate. You have good to excellent credit. |
| Buy now, pay later plan | You want to spread the payment out on a purchase. You want to avoid interest charges. You’ll have the cash to pay the balance off within the plan period. |
| 0% intro card | You have excellent credit and qualify. You want to pay off some low-interest credit cards. You can pay the balance off before the promotion period ends. |
| Peer-to-peer (P2P) lending | You want more options than one lender can offer. You’ve been turned down by other personal loan companies. |
| Cash advance apps | You have a regular paycheck. You need a small amount and want to avoid payday loans. |
| Retirement loans | You’re eligible for loans on your retirement. You’re not planning to retire or switch jobs soon. |
1. Credit cards
Who it’s better for
A credit card is a good alternative to personal loans for covering ongoing expenses, as long as you don’t max out your available credit. It’s also beneficial if your income is unpredictable or seasonal since you can make minimum payments.
People often choose credit cards over personal loans because of the payment flexibility they offer. You can use as much or little of your available credit as you want, versus getting all your funds at once with a personal loan. The entire balance can be paid off and reused as you wish.
The monthly payment on a credit card works differently from a personal loan payment. A credit card minimum payment is only based on the amount of credit used. That may be easier on your budget than a fixed personal loan payment, especially if you have variable income from tips or commissions. Credit cards can also come with cash back or travel rewards and perks you won’t get with personal loans.
It’s best to pay your balance in full each month to keep your credit scores from dropping. Unlike a personal loan, your credit card balance directly affects your credit utilization ratio. The more available credit you use, the more your credit scores could drop. Credit interest rates are also variable, compounding and typically much higher than personal loan rates.
Benefits
- The full credit line is available immediately and can be paid off and reused.
- You can borrow and pay back incrementally as needed since credit cards are a type of revolving credit.
- Your monthly payment is only based on the amount of credit you use, not the entire amount available.
- Some cards provide rewards for each dollar borrowed, like cash back or points toward travel.
Drawbacks
- Interest rates may be substantially higher compared to personal loans and may rise or fall month to month.
- Using more than 25 percent of your available credit can ding your credit score, making you less likely to qualify for other credit products.
- If you don’t budget to pay the balance in full each month, you may end up in steeper debt and begin a cycle of spending more than you earn.
2. Home equity loan
Who it’s better for
Home equity loans are better for borrowers who need a longer term than personal loans offer and have plenty of equity in their property.
In many ways, a home equity loan is similar to a personal loan. You receive all the money at once and make fixed-rate payments for the life of the loan. The key difference is that home equity loans are secured by your home, and the lender can foreclose if you default.
Home equity loan rates are traditionally lower than personal loans. However, excellent credit personal loan rates are worth exploring for high credit score borrowers as they have dropped to single-digit levels that often rival home equity loan rates.
Home equity loan terms can be as long as 30 years, giving you a much lower monthly payment than the seven-year maximum term you typically find with personal loans. There are even tax benefits if the funds are used exclusively for home improvements.
Lenders limit how much equity you can borrow, and you’ll need at least a fair or good credit score to qualify. It may take weeks to get approved and receive home equity loan funds compared to a day or two to get personal loan funds.
Benefits
- Longer repayment terms than many personal loans, sometimes up to 30 years.
- Potential tax benefits if the funds are used exclusively for home upgrades or renovations.
- Better rates for fair and good credit borrowers.
Drawbacks
- May lose your home if you can’t repay the loan.
- Must have enough equity in your home to qualify.
- May take several weeks to get funds with more paperwork requirements.
- Bad credit borrowers won’t qualify.
3. Home equity line of credit (HELOC)
Who it’s better for
Home equity lines of credit may be a better option for those who don’t want the entire sum at once and who have a large amount of equity in their home.
Like a home equity loan, a HELOC is secured by your home. However, it works more like a credit card, allowing you to use as much or as little credit as needed.
Your payment is based on the amount you’ve drawn and can be paid off and used again during the “draw period,” which may last 10 to 15 years. Some HELOCs only require interest payments during the draw period, which can be helpful cash flow management for fix-and-flip businesses or other self-employed side hustles.
After the draw period, your balance is treated as an installment loan, with regular payments until it is paid off. You may be able to deduct HELOC interest on funds used for home renovations and borrow more than the $100,000 cap usually set by personal loan guidelines. But there may be ongoing and one-time costs. Plus, defaulting puts you at risk of losing your home.
Benefits
- Comes with a draw period of several years to use and pay down the credit as needed.
- Repayment terms can last up to 30 years between the draw and repayment period.
- Rates may be better than personal loans for fair and good credit borrowers.
Drawbacks
- You could lose your home if you can’t repay the credit extended.
- Interest rates may vary until you finish your draw period.
- Processing can take several weeks when establishing your line of credit.
4. Cash-out mortgage refinance
Who it’s better for
A cash-out refinance is better for homeowners with poor credit and substantial equity in their home who don’t want to pay bad credit personal loan rates.
Homeowners with significant equity in their homes may be able to borrow more than they currently owe and pocket the difference with a cash-out refinance. Some programs like the FHA cash-out refinance allow borrowers to qualify with scores below 580 and spread the payments over a 30-year term.
The mortgage process may take 30 to 45 days to complete and requires more in-depth financial paperwork than the required personal loan documentation. Replacing your current mortgage may not make sense if your current rate is very low. Plus, you risk losing your home in foreclosure if you can’t make payments.
Benefits
- Lower rates and longer terms offered compared to personal loans.
- Government refinance options for borrowers with scores of 580 or lower.
Drawbacks
- Takes longer to complete with more paperwork and higher costs.
- The bank could foreclose on your home if you default.
5. Personal lines of credit
Who it’s better for
Borrowers who don’t own or want to borrow against their homes and want the convenience of using and repaying credit for ongoing expenses may benefit from a personal line of credit.
If you don’t need all your funds now or don’t know how much to borrow, a personal line of credit may be a good alternative to a personal loan. Like credit cards, personal lines of credit are unsecured and revolving, so you can borrow what you need as you need. However, the rates on personal lines of credit are usually lower than credit cards.
This type of credit is often suitable for expenses like ongoing home improvement projects or as a cushion for personal emergencies if you don’t have emergency savings built up. You can use a portion of your line, pay it in full and reuse it. You may not qualify for a personal line of credit unless you have stellar credit and stable income.
Benefits
- You can borrow as much or as little as you need when you need it.
- You’ll only be charged interest on what you borrow.
- Doesn’t require collateral like a home equity line of credit.
Drawbacks
- Eligibility requirements may be strict.
- Variable interest rates can make repayment terms hard to predict.
- Personal lines of credit are not as common as credit cards or personal loans.
6. Buy now, pay later apps
Who it’s better for
Consumers that want to spread the payments on a purchase up to around $1,500 over a few weeks without paying interest or fees.
If you want to avoid interest charges or just need to spread a purchase out over a few extra weeks or months instead of paying all at once, buy now, pay later (BNPL) apps may work better for you than personal loans. Payments are typically made over four to six weeks and are often interest-free.
Bankrate’s Buy Now, Pay Later Survey found over a third of U.S. adults (39 percent) have used one of these plans to finance a purchase. The lack of interest makes them much less expensive than personal loans. However, their convenience can lead to buying items you can’t actually afford with steeper payments than personal loan options.
Benefits
- Easier to qualify for than personal loans.
- Typically no interest or late fees.
- Doesn’t usually require a hard credit check.
Drawbacks
- Temptation to overspend.
- Payments not usually reported to credit bureaus.
- Short pay off period may make payments higher than those for personal loans.
7. Zero percent intro card
Who it’s better for
A credit card with a low intro offer is better for borrowers with excellent credit who want to reduce or eliminate their interest rate charges and can afford to pay off the balance within 21 months.
Some credit cards offer introductory periods with low or no interest. Most often, these are balance transfer credit cards.
If you have a current credit card balance and want to eliminate interest charges, see if you qualify for a balance transfer card with a 0 percent intro annual percentage rate (APR). You won’t pay any interest if you pay the balance off within the introductory period, which typically lasts between 12 and 18 months.
That said, you’ll need stellar credit to qualify and may have to pay a fee of 3 percent to 5 percent on transferred balances. And, of course, any remaining balance at the end of the introductory period will start accruing interest again.
The interest-free introductory period makes these cards good alternatives to a personal loan. Check for limits on the amount you can transfer — you may not know what it is until you apply for the card.
Benefits
- No interest charges during the intro period.
- Reduces your credit card monthly payments.
Drawbacks
- Need excellent credit for approval.
- Will pay fees on the amount transferred.
8. Peer-to-peer lending
Who it’s better for
Consumers that have been turned down by individual personal loan lenders and want a second chance at approval may want to look into P2P loans.
With peer-to-peer lending, you apply to a group of investors rather than just one bank or financial institution. Because you’re applying to several different investors with different lending requirements, you increase your odds of getting an offer. A traditional lender will simply turn down your application if you don’t qualify.
Benefits
- More options to get funding from a variety of lenders rather than just one.
- Fair credit borrowers may qualify.
Drawbacks
- May pay more in fees than other loan types.
- Your rate may be higher depending on which peer-to-peer marketplace you choose.
9. Cash advance apps
Who it’s better for
Paycheck advances are best for those with predictable income who need extra cash quickly between paychecks and want to avoid taking out a new loan.
If you earn a regular paycheck but are short of cash between pay periods, a cash advance app may bridge the gap without committing you to new long-term debt. Cash advance apps allow you to get an advance of between $50 and $750, depending on the app. The advance is repaid when you get your next paycheck.
Some apps don’t charge fees but request tips or contributions to keep the service going. However, most charge an “instant” cash fee if you need funds immediately, and some come with monthly subscription fees. Remember to budget for a smaller paycheck on your next payday, too.
Benefits
- Approval only requires a regular direct deposit and valid bank account.
- Can get cash instantly for a fee.
Drawbacks
- Instant cash and subscription fees may apply.
- May lead to a cycle of borrowing against your next paycheck.
10. Retirement loans
Who it’s better for
A 401(k) loan is best for those with a large amount of money in their retirement plan but who aren’t planning on retiring or switching jobs soon.
People with money saved in an employer-sponsored retirement plan may be eligible to borrow money against it with a 401(k) loan. No credit check is required and interest rates are usually much lower than other loan types — plus any interest is typically paid back into your retirement plan.
By law, you may only borrow up to the lesser of $50,000 or 50 percent of your vested balance. It may take several weeks to process the loan. The drawback to this type of loan is that you are trading long-term savings for short-term debt. The money you borrow doesn’t grow, which could affect your retirement plans if you’re close to retiring. There may also be tax consequences if you switch employers before the balance is repaid.
Benefits
- No credit qualifying requirements.
- Rates are usually lower than most other types of loans.
- No new debt is reported on your credit report.
Drawbacks
- Limited to $50,000 or 50 percent of vested balance.
- Taxes and penalties could be assessed if you don’t repay the loan on time.
- You may not have enough vested to be eligible.
When to avoid a personal loan
Don’t commit to a personal loan if you do not have a clear idea of how much you need or how you will spend the money. While it may be convenient to have extra cash on hand, you’ll be stuck with a monthly payment for one to seven years.
Be mindful of whether you’re using personal loans as a stopgap for overspending habits. Many people use a personal loan to consolidate their debts without adjusting their credit card use. It’s best to allocate any monthly savings from a debt consolidation loan into an emergency fund so you don’t resort to swiping your credit card because you’re short of cash.
Frequently asked questions about personal loan alternatives
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