Managing Money

7 Personal Loan Alternatives

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Other borrowing options to consider when financing your next big expense.

Personal loans are only one potential source of financing available. From credit cards to installment loans, you’ll find plenty of alternatives to personal loans.

Top 7 alternatives to personal loans

Funding options abound across traditional and nontraditional lenders, often with benefits and features you won’t find with a traditional personal loan.

Home equity lines of credit and loans

  • Best if you own your home and have a lot of equity.

Home equity loans and lines of credit are separate types of loans that let you borrow from the equity you’ve built in your home. Because they’re secured by your home, you can often score a lower APR than you’ll find with an unsecured personal loan. You can use your loan for just about anything, but many choose to invest their HELOC or home equity loan back into their house through renovations.

The main drawback to equity-related loans is that you’re using your house as collateral. If you’re not able to repay what you borrow, your lender can repossess your house. You may not be willing to take that risk without good reason.

Personal lines of credit

  • Best if you’re looking for terms like a personal loan.

personal line of credit works like both a credit card and a personal loan. You’re approved for a credit limit that you can draw from, just like with a credit card. But the interest rate and loan terms are more like those for a personal loan. You pay interest only on what you borrow, which can be any amount up to your credit limit.

You’ll usually need to meet the same requirements as a personal loan to qualify. Many lenders also charge an annual fee while your line carries an outstanding balance. Despite this, lines of credit can give borrowers more flexibility than term loans, offering you the independence to borrow as you see fit.

Credit cards

  • Best for when you need more options to pay.

Credit cards are a go-to option for many people. That’s often because they come with revolving credit limits and the ability to make minimum payments against interest. The APR you’re offered tends to be higher than what you’d receive from a personal loan, but the variety of card types and perks — like travel rewards or cash back — keeps your options wide open.

Although you can find personal loans for those with bad credit, it could be easier to apply for a secured credit card. These cards are designed to help you build or rebuild your credit over time, offering upgrades to an unsecured card or easier access to stronger loan options as your needs change.

Peer-to-peer loans

  • Best if you’re looking for multiple investors.

Peer-to-peer loans are technically personal loans, but rather than go through a lender for your funding, you submit an application that multiple investors look at before deciding to take you on as a borrower. While the process can take more time than other types of personal loans, you may not end up paying as much in interest.

Most peer-to-peer lenders look for applicants with good to excellent credit. Because you’re not working with a direct lender, payment terms can be flexible, though you may pay the price with higher origination fees.

Bad credit installment loans

  • Best if your credit score is less than perfect.

Installment loans are similar to payday loans, but with longer terms to pay back what you borrow. And you don’t need great credit to qualify — which is helpful if you’ve had trouble repaying debts in the past.

However, installment loans are a type of short-term loan. You’ll end up paying a hefty amount in interest, and the terms still aren’t as long as other personal loan alternatives.

Small business loans

  • Best if you own a business with consistent revenue.

Small business loans are an excellent choice if you’re a business owner, and can help you build your business’s credit with extra capital to expand on exciting new projects. You may need to put together a solid business plan to show to lenders, but terms are based on your business — not on your personal assets.

Credit union loan

  • Best if you have an established banking relationship.

Many credit unions offer unsecured personal loans to their members. Rates tend to be lower than online lenders, and you’ll have access to bankers that know you and your situation. That relationship can make it easier to negotiate payment terms if you fall on hard times unexpectedly.

When is a personal loan not the best borrowing option?

If you’re considering a personal loan alternative, then you’ve likely come across a situation where a personal loan just didn’t work for you. Applicants with bad credit can find it hard to qualify for unsecured options, while those with decent credit may have a tough time finding a loan with good rates. More often, you’ll also need to borrow a high minimum — around $5,000 or more.

If you’re in this situation, it’s worthwhile to browse alternatives to find a lending option that better suits your needs and budget. Carefully consider the benefits and drawbacks of each credit option before committing to a contract.

When is a personal loan a good idea?

If you’re looking for long repayment terms without putting up collateral, a personal loan is one of the better ways to finance a big expense. Online lenders typically process applications quickly, giving you the expediency of a short-term loan without the cost.

Personal loans are commonly used to consolidate debt. The loan can bring together all your debt under one lender, ideally lowering your monthly payments and simplifying the repayment process with one monthly statement. If you have a lot of outstanding debt, a personal loan can also help you refinance at stronger terms or rates.

How do I decide which financing option is best for me?

Determining the right financing option for you requires research and planning. Consider the factors that can affect your interest rate, repayment terms and loan features before signing the dotted line on your loan agreement.

  • Interest rate. Your credit plays a huge role in your interest rate, no matter the type of loan you choose. Because some lenders are known to offer stronger rates than others, comparing APR options across the board can help you find the lowest overall cost at the best terms you’re eligible.
  • Collateral. Some loans require you to put up collateral — personal assets like your home or business — to secure your loan. That security often leads to a lower interest rate, but you may not be willing to risk your personal assets for negligible savings.
  • Processing time. Different types of loans require different turnaround. Loans from credit unions and peer-to-peer lenders come with more scrutiny, often resulting in long processing times. But you could be preapproved for a line of credit or an installment loan in a matter of minutes.
  • Repayment terms. Each lender imposes different repayment terms. This is especially true for installment loans, which generally come with much shorter terms than other options. Determine how much time you need to comfortably repay your loan when comparing your options.

Bottom line

Personal loans are a convenient way to get the money you want, but they aren’t always the right choice for your needs. Before committing to a loan, compare your full range of borrowing options to find the strongest rates and longest terms you’re eligible for. That way, you’ll know you’re getting a good deal with features that work for you.

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