Alternative loans for fair credit borrowers

A personal loan for fair credit can be a handy way to fund expenses like a wedding or home improvement project. But they aren’t always the right choice; those with a less-than-stellar credit score may be able to find a different product that could suit your budget better.

Credit cards, lines of credit and other financing can help you improve your credit score with a positive repayment history. They also offer more flexible financing requirements than some loans, which makes them a good alternative if you don’t need — or can’t qualify — for a personal loan.

What qualifies as fair credit?

The FICO scoring system is one of the most commonly used by banks, online lenders and credit card companies. It breaks down scores into categories, with fair credit being the second lowest.

• Exceptional: 800-850
• Very Good: 740-799
• Good: 670-739
• Fair: 580-669
• Poor: 300-579

Fair credit is any score between 580 to 669. Borrowers with fair credit generally receive higher rates than borrowers with good credit and are less likely to get approved for a loan.

Thankfully, if a traditional personal loan isn’t the best route for you, there are still a variety of financing options out there. With a positive repayment history, many can help improve your credit score, which may give you access to better rates in the future.

Peer-to-peer loans

Unlike a traditional personal loan, peer-to-peer (P2P) lending connects borrowers to investors. These investors may be individuals, a larger company or a mix of the two. Because of this, the eligibility criteria is often less strict than with a personal loan funded by a single lender.

That being said, rates can also be higher and P2P loans often take longer to fund. P2P lenders also charge high origination fees — sometimes as high as 8 to 10 percent of the loan amount.

Federal credit union loans

Looking into a federal credit union may be a good option if you have fair credit. Because credit unions are member owned, they are able to offer loans to borrowers who may otherwise be considered “too risky” due to thin credit or a lower score.

In addition, the APR for credit union loans is capped at 18 percent, which means you’ll pay less over the life of the loan in interest. Lenders that cater to those across the credit spectrum can charge rates as high as 32 percent.

The major drawback is that you must be a member of the credit union in order to qualify. While the membership requirements are generally easy to meet, in many cases, you’ll be required to open an account with a small sum during the application process.

Keep in mind that having an account and being a member of the credit union isn’t the key to getting approved for a loan, and you may still be rejected if you don’t meet the eligibility criteria.

Credit cards

Credit cards can be a good way to build your credit score and increase your borrowing capacity — if you’re diligent about making payments. There are a number of credit cards for fair credit available, though they may have less competitive rates and fees when compared to similar cards for borrowers with good and excellent credit.

Still, they are worth looking into as an alternative to a personal loan. Rather than supplementing your spending, you can manage your day-to-day costs and pay off your card in full at the end of each billing cycle. This will help you avoid fees, build your credit and qualify for better cards — and loans — in the future.

Home equity loans and lines of credit

A home equity loan or home equity line of credit (HELOC) both use your home’s equity — the market value of your home versus how much you’ve paid off — as collateral. Because of this, you may be able to score a more competitive interest rate as lenders incur less risk with a backed loan.

However, if you default on the balance, your home could be seized to satisfy the delinquent payments.

Despite that risk, home equity loans and HELOCs are a good option if you would otherwise not have access to the funds needed for a large expense, like schooling costs or large renovations. Plus, since they have lower rates than personal loans, they can be less expensive in the long run if managed properly.

Lines of credit

Lines of credit for borrowers with fair credit are similar to credit cards. You’ll  have a credit limit — typically a few thousand dollars — that you can draw from when you need it. You’ll only pay interest on the money you use and as you repay, you gain access to that funding again, making them ideal for long-term projects, expenses or renovations.

Lines of credit tend to have less fees and lower interest rates than credit cards, and unlike personal loans, they’re more flexible in the long-run.

However, they don’t come with the rewards that most credit cards offer, which can be a downside but it does make them a less expensive option.

While these may be more suitable than other forms of funding for more expensive endeavors, lines of credit aren’t as popular as personal loans, which can make finding the best option for you a bit more difficult.

When to avoid financing all together

Loans and credit cards may be convenient, but they frequently come with high interest rates when you have low credit or a thin credit history. If you already have a lot of debt or don’t have a steady source of income, it is better to turn to alternatives.

Reworking your budget to accommodate a planned expense or to build up savings will benefit you in the long run. It may mean waiting longer to cover costs, but you will spend less money overall.

Alternatives to loans

If you do need to cover an immediate expense or are having a difficult time managing your existing debts, there are less common options available for borrowers in similar situations.

When assessing your options, it’s important to thoroughly research each method to make sure you’re putting yourself in an advantageous position. However, it’s important that you don’t stall or delay the process to minimize further interest accumulation.

• Negotiate with creditors or consider debt relief options. It isn’t the most pleasant task, but creditors may be willing to work with you to come up with a reasonable payment plan if you are struggling. You can also work with a debt relief company that, in exchange for a fee, will act as a middleman with your creditors to help lower or cancel your debts.
• Nonprofits. There are national and local nonprofits and religious groups that may be able to help if you are experiencing a financial crisis.
• Salary advances. Your employer — especially if you work for a large business — may be willing to offer you an advance on your next paycheck. However, be cautious with this route;  while this can help with a sudden bill or expense, you’ll have less money on your next payday.

The bottom line

A personal loan may be a common solution to financing, but it isn’t the only solution. Research your options to find the most cost-effective choice. Ultimately, fair credit won’t stop you from getting a loan — you just need to be aware of the costs associated with a personal loan, credit card or alternative.