7 Alternatives to Personal Loans

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ByChristopher Boston
Edited byRae Osborn
ByChristopher Boston
Edited byRae Osborn

Updated: February 14, 2024

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Personal loans serve as a versatile financial tool for various purposes, such as consolidating debts, funding large expenses or covering unforeseen costs. However, they’re not a one-size-fits-all solution, and it's important to recognize that there might be more suitable options for your specific financial scenario.

Exploring alternatives to personal loans is crucial for making well-informed financial decisions. Options like credit cards, personal lines of credit, home equity loans or lines of credit, peer-to-peer loans, 401(k) loans, salary advances, or mortgage refinance offer different benefits. They may align better with your financial goals and situation. Understanding each alternative allows you to choose a solution that best fits your unique needs and circumstances.

Credit Card

A credit card provides a revolving line of credit, allowing you to borrow funds up to a certain limit for purchases or cash advances. One of the main benefits of credit cards is their flexibility — you can use them for a wide range of transactions, from daily purchases to larger expenses, as long as you stay within your credit limit.

When you use a credit card, you can repay the borrowed amount in full by the due date each month or carry a balance to the next month. However, it's important to note that carrying a balance can attract high interest rates, making it essential to manage this carefully to avoid excessive debt.

Many credit cards feature rewards, such as cashback or points on purchases, enhancing their value. Additionally, certain credit cards offer introductory specials like 0% APR (Annual Percentage Rate) for a set period, which can be beneficial for large purchases or balance transfers. This period allows borrowing without interest charges, though it's crucial to plan for the rate increase once the promotional period ends.

Pros and Cons of Credit Cards

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  • Credit cards offer a revolving line of credit, providing flexible access to funds.
  • They are versatile for financing a range of transactions, from daily purchases to larger expenses.
  • Repayment options are flexible, allowing full payment or carrying over balances to subsequent months.
  • Many credit cards come with rewards programs, offering cashback or points on purchases.
  • Special introductory offers like 0% APR for a limited time can be financially advantageous.
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  • Carrying a balance on credit cards can lead to high interest rates.
  • There is a risk of accumulating significant debt if spending is not carefully managed.
  • After introductory periods, credit cards often revert to higher standard interest rates.
  • Late payments and exceeding credit limits can incur additional fees.

Personal Line of Credit

Like credit cards, a personal line of credit gives you access to a predetermined amount of funds you can draw upon as needed. This flexibility is one of its main advantages, as it allows you to borrow exactly what you need, when you need it, up to the credit limit.

When you access funds from your personal line of credit, you can withdraw the amount you require, and interest is typically charged only on the amount you use, not the entire credit line. Repayment terms can vary, but generally, you'll have the option to pay back the borrowed amount over a period of time, either through regular payments or more flexible arrangements.

It’s worth noting that personal lines of credit may charge lower interest rates on the amount used compared to credit cards. However, this alternative has drawbacks, including fees and variable interest rates, which can increase the borrowing costs over time.

Pros and Cons of Personal Line of Credit

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  • Personal lines of credit offer flexible access to funds, allowing you to draw exactly what you need.
  • Interest is typically charged only on the amount used, not the entire credit limit.
  • Flexible repayment options are available, often with the ability to make regular or more adaptable payments.
  • Potentially lower interest rates on used amounts compared to credit cards.
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  • Variable interest rates can increase the overall cost of borrowing over time.
  • Easy access to funds might lead to overspending and financial mismanagement.
  • Some personal lines of credit may come with additional fees.

Home Equity Loan or Home Equity Line of Credit (HELOC)

Home equity loans and home equity lines of credit (HELOC) both utilize the equity in your home as collateral. A home equity loan provides a lump sum of money that is repaid over a set term with fixed interest rates, making it a predictable borrowing option. In contrast, a HELOC offers more flexibility, functioning like a credit card with a revolving credit line based on your home's equity.

Repayment for a home equity loan involves regular monthly payments covering both principal and interest, similar to a standard loan. For a HELOC, during the draw period, you may only need to pay the interest on the amount borrowed. Once this period ends, you'll need to start repaying the principal as well.

Using your home equity for loans can be beneficial as you can secure lower interest rates and larger loan amounts than unsecured personal loans, depending on your home equity. However, your home will serve as collateral, meaning if you default on the loan, you could potentially lose it. Additionally, the process to obtain these loans can be more complex and time-consuming, often involving fees and stricter requirements.

Pros and Cons of Home Equity Loans or HELOCs

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  • Interest rates are lower compared to unsecured personal loans.
  • You can get larger loan amounts based on the equity in your home.
  • Home equity loans have fixed interest rates, offering predictable monthly payments.
  • HELOCs provide flexible access to funds, similar to a credit card, and interest is charged only on the amount borrowed.
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  • Your home is used as collateral, risking property loss if you default on the loan.
  • The application process can be complex, time-consuming and may involve fees.
  • HELOCs often have variable interest rates, leading to unpredictable payment amounts.
  • Requires sufficient home equity, limiting this option for recent homebuyers or those with a significant mortgage balance.

Peer-to-Peer Loan

Peer-to-peer (P2P) lending presents a modern alternative to traditional personal loans, connecting borrowers directly with individual investors through online platforms. This system bypasses traditional financial institutions, often resulting in a more streamlined and accessible lending process.

In P2P lending, borrowers create a profile and post a loan request on the platform, specifying the amount needed and the purpose of the loan. Investors then review these requests and choose to fund them, either partially or fully, based on the borrower’s creditworthiness and the loan's purpose.

One of the main benefits of P2P loans is potentially lower interest rates for borrowers with good credit, as the peer-to-peer model can reduce overhead costs associated with traditional banking. However, P2P loans have drawbacks, including potentially higher interest rates for those with lower credit scores.

Pros and Cons of Peer-to-Peer Loans

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  • Have potentially lower interest rates for borrowers with good credit.
  • Use a streamlined and accessible online application process.
  • A direct connection between borrowers and individual investors can reduce overhead costs.
  • Typically, there are quicker processing times compared to traditional bank loans.
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  • Higher interest rates may be imposed on those with lower credit scores.
  • The risk associated with less established lending platforms.
  • Loan terms and conditions can vary significantly, requiring careful research.

401(k) Loan

A 401(k) loan allows you to borrow from your employer-sponsored retirement plan. Typically, you can access up to a certain limit of your account balance, avoiding the taxes and penalties of early withdrawal under normal circumstances.

To take out a 401(k) loan, you must adhere to the rules set by your employer's retirement plan. Once your loan request is approved, the amount is deducted from your 401(k) balance. The repayment of this loan is usually structured over five years and is done through payroll deductions, encompassing both the principal and interest. Interestingly, the interest paid on the loan is credited back into your 401(k) account.

With a 401(k) loan, you don’t have to meet a minimum credit score requirement. However, if you leave or lose your job, the loan might need to be repaid in full in a short time frame, or it will be considered a taxable distribution.

Pros and Cons of 401(k) Loans

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  • 401(k) loans allow borrowing from your own retirement fund without a credit check.
  • Interest on the loan is repaid back into your 401(k) account.
  • It provides quick access to funds without the taxes and penalties of early withdrawal.
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  • Requires repayment in full if you leave or lose your job, potentially becoming a taxable distribution.
  • Loan terms and availability are subject to the rules of the employer-sponsored 401(k) plan.
  • Borrowed funds miss out on potential investment growth, impacting retirement savings.

Salary Advance

A salary advance allows employees to receive a portion of their future salary ahead of the regular payroll schedule. This option is particularly useful when you need access to funds you've earned but haven't yet received.

An employee typically submits a request through their employer's human resources or payroll department to obtain a salary advance. If the request is approved, the advance is directly deposited into the employee's bank account or provided as a check.

Salary advances may not involve interest charges or additional fees, making them a financially sensible choice. They also bypass the need for credit checks. However, the amount available for an advance is limited to the earnings accumulated up to that point, which may restrict the sum accessible. Additionally, not all employers offer this option, and those that do may have varying policies regarding its usage.

Pros and Cons of Salary Advances

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  • Salary advances may not incur interest charges or additional fees.
  • They eliminate the need for credit checks as the advance is against earned salary.
  • They offer immediate access to funds based on already earned income.
  • One option for repayment is through payroll deduction.
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  • Limited to the amount of salary already earned, restricting accessible funds.
  • Not consistently available as employer policies on salary advances can vary.
  • Some salary advances may include administrative fees and other costs.
  • You might have to reveal personal details about your finances to your employer.

Mortgage Refinance

Mortgage refinancing allows homeowners to replace their existing mortgage with a new one, often with different terms. In a refinance, the new mortgage pays off the remaining balance of the old one. If the refinance amount is larger than the existing mortgage, the difference is provided to the homeowner in cash, which can be used for various purposes like debt consolidation, home improvements or other significant expenses.

The mechanics of mortgage refinancing involve applying for a new loan, undergoing a credit check and completing a property appraisal to determine the home's current value. The terms of the new mortgage, including interest rate and duration, can vary and are typically influenced by current market conditions and the borrower's creditworthiness.

Refinancing can offer lower interest rates than other types of borrowing, potentially leading to reduced monthly payments or a shorter loan term. However, it involves various costs, such as application fees, appraisal fees and closing costs. It also extends the period of debt, which can impact long-term financial health.

Pros and Cons of Mortgage Refinancing

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  • Mortgage refinancing can lower interest rates, leading to reduced monthly payments or a shorter loan term.
  • This process provides an opportunity to tap into home equity without the need to sell the property.
  • You can use the funds for consolidating debts or funding significant expenses.
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  • Refinancing your mortgage involves various costs, including application fees, appraisal fees and closing costs.
  • It extends the period of debt, potentially impacting long-term financial health.
  • Applying requires a credit check and property appraisal, adding to the complexity of the process.

When to Avoid Personal Loans

Personal loans can be a versatile financial tool, but there are instances where there might be other suitable options for you. These include:

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    High Interest Rates for Poor Credit

    If you have a low credit score, personal loans can come with high interest rates. This makes borrowing more expensive over time. It may be better to seek alternatives like secured loans or improve your credit score before applying.

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    Short-Term or Small Financial Needs

    For small or short-term financial needs, personal loans can be excessive. Options like credit cards or a salary advance may be more appropriate. These alternatives often provide quicker access to funds for immediate, smaller expenses.

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    Consolidating Low-Interest Debts

    If you're considering consolidating existing debt, a personal loan may not always be beneficial. When your current debts have low interest, consolidating them into a higher-interest personal loan could increase your overall repayment amount. In such cases, maintaining the current repayment plan might be more cost-effective.

As always, assess your financial situation and the loan's terms to ensure that a personal loan aligns with your financial goals and capabilities.

Frequently Asked Questions About Personal Loans

Navigating the landscape of personal loans can often raise several questions. To help provide valuable insight and clarity on this complex topic, MoneyGeek answered some frequently asked questions below.

What is the best alternative to a personal loan?
What personal loan alternative to avoid?
What type of loan is the easiest to get?
Is it better to get a personal loan or use credit cards for large purchases?
How does a personal line of credit differ from a HELOC?

About Christopher Boston

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Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.

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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.