Key takeaways

  • Many alternatives to bad credit loans may come with lower costs and save you money in the long run.
  • Some options, like using a home equity loan or cash-out refinance, require collateral and can put your home at risk if you default.
  • It's important to also work on improving your credit score to have better borrowing options in the future.

There are several ways to get cash if you aren’t comfortable with taking out a loan for bad credit. You may be better off using a credit card, asking a friend or family member for help or tapping your 401(k) for funds. If you’re stuck with a high doctor’s bill or a large winter or summer electric bill, you may be able to work out a payment plan instead of borrowing extra money.

You may not be able to access cash as fast and might even need to jump through some extra hoops if you opt out of a bad credit loan. You can always compare fair credit loan rates to see if you qualify and determine if this is the right choice for you. However, you could save yourself hundreds, if not thousands, of dollars in interest charges and fees if you choose an alternative to a bad credit loan.

8 alternatives to bad credit loans that can save you money

While bad credit loans provide quick access to cash if you’re in a financial bind, plenty of other options may come with lower costs. Some options may not involve any costs if you have a good relationship with a friend or relative. Knowing the alternatives to bad credit loans could save you money in the long run.

1. Use a credit card

There are several credit cards for bad credit that may give you the funds you need in a tight spot. Rates are much lower than payday or auto title loans, and you can make minimum payments on the amount you borrow until you have the cash to pay the balance off.

Although credit card interest rates are higher than most personal loans, you aren’t stuck with a fixed payment for one to seven years as you would be with a personal loan. You can avoid paying interest altogether if you can pay off all or most of your monthly balance.

2. Consider a peer-to-peer loan

Getting a loan from an individual or credit union can be challenging if you have bad credit and don’t meet that particular lender’s requirements. Peer-to-peer loans match you with groups of investors. They may be willing to share the risk of lending to a bad credit borrower with other investors, which a single bank or lender can’t do.

Peer-to-peer lenders may offer loan options for borrowers with scores as low as 600. Qualifying rules may be less stringent than other lending types and can be funded as quickly as a personal loan. Like other bad credit loans, your rate and fees will be higher the lower your credit score is.

3. Use a home equity loan or HELOC

If you own a home and have some equity in it, you can convert a portion of your equity into cash with a home equity loan or a home equity line of credit (HELOC). You typically need a credit score of at least 620 to qualify, and rates are significantly lower than credit cards and payday loans.

A home equity loan works like a personal loan. You will be paid out in a lump sum and make fixed payments over a set period, usually between 15 and 30 years. A HELOC operates more like a credit card, giving you money as needed. You can pay off your HELOC balance and re-use the line of credit during the “draw period,” which usually lasts ten years. After that period ends, the HELOC balance is paid off in installments.

Both types of loans are considered second mortgages, meaning you have two monthly mortgage payments. Your home is collateral for home equity loans or HELOCs, and the lender can foreclose on your home if you’re unable to repay them.

4. Consider using a buy now, pay later (BNPL) loan

A buy now, pay later loan allows you to pay debt by splitting big purchases into more affordable installments. You can typically pay off your interest-free balance in four monthly installments.

You can use BNPLs to pay for emergency repair materials, replace an appliance or finance any other big purchase. Most retailers offer BNPLs as part of their payment options.

A word of caution: The convenience of these apps and tools can make it easy to spend over your budget. Multiple loan payments may be difficult to manage and could result in a missed payment that further damages your credit.

5. Request a payment plan

Depending on the expense, you can request a payment plan instead of taking out a new loan. You may be eligible for low- or no-interest payment plans to pay for:

  • Utility bills.
  • Medical expenses.
  • Dental work.
  • Taxes.

Utility companies may extend your due date or allow you to pay it over several months. Ask about “level pay” options that give you a predictable payment for electric, water or gas bills. This can help you avoid high bills during heavy-use seasons like winter and summer.

Medical and dental offices often offer options to spread your payments for several months. Contact your tax authority to discuss payment options if you get behind on federal, state or property taxes.

6. Borrow from friends or family

Financial challenges and road bumps affect many people, and friends and family will likely understand your challenges the most. Asking loved ones to lend you money can be scary, as there’s always the chance it could put a strain on your relationship if you can’t repay it. Be open and communicative with whoever is lending you the money, and set up a payment contract to keep you accountable for monthly payments.

It’s important to know that you aren’t alone when you’re financially struggling. Even if family or friends can’t lend you the cash you need directly, they may be able to support you in other ways. Ask for help with childcare if you need to take on a temporary second job or side hustle. Or maybe they can make extra meals for you so you can reduce your grocery bill in between paychecks. Little gestures like this may be enough to get you through a rough money patch.

7. Borrower against a retirement account

If you have money vested in a retirement account like a 401(k) through your employer, you can borrow against part of the value. With a 401(k) loan, you don’t need to qualify based on your credit, and rates are usually very low. You have to pay the loan back in five years, and the payment is deducted from each paycheck until it’s paid in full.

You could pay taxes or penalties if you leave your job before the balance is paid off.  You also can’t borrow over 50 percent of your vested account balance.

8. Consider a cash-out refinance on your home

A cash-out refinance involves borrowing more than you currently owe and pocketing the difference in cash. Mortgage rates tend to be much lower than other types of bad credit loans. You may even be eligible for an FHA cash-out refinance with a credit score as low as 500, as long as you have more than 20 percent equity in your home.

Closing costs are more expensive since you borrow more, and you’ll need to go through a longer approval process — sometimes as long as 45 days — to get your funds. Like home equity loans and HELOCs, your home is collateral for this type of refinance, which puts you at risk of losing your home if you default.

The bottom line

It’s best to consider the alternatives to bad credit loans to avoid paying exorbitant interest rates and closing costs. If you don’t need the funds urgently, take the time to weigh the benefits and drawbacks of each type of bad credit loan and the alternatives.

Take steps to improve your credit score whenever you can and you may be able to qualify for a fair credit loan. Avoid maxing out your credit cards and pay all your credit accounts on time. Run your situation by a credit counselor if you’re unsure which way to go, or consult a debt relief company if you don’t have the income to repay your debts.