Key takeaways

  • Credit cards and other lines of credit may give you more payment flexibility than personal loans.
  • Home equity loans and HELOC payments may be lower with longer terms available.
  • A retirement loan or salary advance doesn’t require credit approval and may be easy to get through your employer.

If you’ve checked out the pros and cons of personal loans and they don’t quite meet your needs, it’s worth it to investigate some other options. You may find that a credit card or HELOC offers more flexible payment terms. A retirement loan won’t ding your credit, but comes with other drawbacks.

These are just a few of several alternatives to personal loans that may be a better fit once you know the qualifying requirements and how they work.

7 personal loan alternatives

There’s a wide variety of loan products besides personal loans, and each comes with its own benefits and drawbacks. Most of them give you the same flexibility to use the funds for any purpose but may come with higher rates or require collateral like your home.

The best option will generally depend on your financial situation, what you need the money for and how quickly you need the funds.

1. Credit cards

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. Credit cards can also come with rewards to get extra cash back or travel benefits.

Payments are also different — credit cards have a minimum payment that’s only based on the credit you’ve used. That may be easier on your budget than a fixed personal loan payment, especially if you have variable income. But 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 has a direct effect on your credit utilization ratio. The more of your available credit you use, the more your credit scores could potentially drop. Credit interest rates are also variable and typically much higher than personal loan rates.

Benefits

  • The full line of credit is available right away, whereas personal loans require an application and processing time.
  • You can borrow and pay back incrementally as needed, as 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 than for a personal loan and can change when the Fed funds rate changes.
  • Carrying a balance 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 start relying on credit and spend more than you earn.

2. Home equity loan or HELOC

Homeowners may choose a home equity loan or home equity line of credit (HELOC) to get access to funds at longer terms than personal loans allow. Home equity loans work like personal loans. You get all your funds at once and make fixed payments usually at a fixed rate.

A HELOC works like a credit card at first, and you only make payments on the amount you use. However, both options use your home as collateral, which means you could lose your home if you can’t repay them.

Borrowers with significant equity in their home may benefit from a home equity loan or HELOC. There are even tax benefits if the funds are used exclusively for home improvements.

That said, you’ll need to meet more stringent credit score requirements for the lowest rates and provide more financial documentation to get approved than personal loan lenders require. It may also take weeks to even over a month to get your funds, compared to a day or two for a personal loan.

Benefits

  • Longer repayment terms than many personal loans, sometimes up to 30 years.
  • May be tax benefits if the funds are used exclusively for home upgrades or renovations.
  • HELOCs offer flexible spending with interest only charged on the amount used.

Drawbacks

  • You could lose your home if you can’t repay the loan.
  • You must have enough equity in your home to qualify.
  • May take several weeks to get funds with more paperwork requirements.

3. Cash-out mortgage refinance

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 out of a 30-year term.

The mortgage process may take 30 to 45 days to complete and requires more in-depth financial paperwork than personal loans. It may not make sense to replace your current mortgage if your current rate is very low. Plus, you risk losing your home in foreclosure if you can’t repay the higher loan amount.

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.

4. Peer-to-peer lending

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 some type of offer. With a traditional lender, they’ll just turn your application down if you don’t qualify.

Benefits

  • More options to get funding from a variety of lenders rather than just one.
  • Fair credit borrowers with scores as low as 600 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.

5. Personal lines 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, as a cushion for personal emergencies or to offset fluctuations in variable income. You can use a portion of your line, pay it in full and then reuse it over time. 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. Retirement loans

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.

There may be restrictions on when and how much you can borrow, and it may take several weeks to process the loan. The drawback to this type of loan is your 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

  • Quick access to lump sums of cash with 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.

7. Salary advances

If you only need a small amount of money — $1,500 or less — ask your employer’s payroll department if they offer salary advances. With a salary advance, you can usually borrow up to 80 percent of your paycheck before your payday, although this figure will depend on your employer’s policy.

The amount is either deducted from your next paycheck, or paid over a longer repayment schedule, if your employer allows it.

Benefits

  • You typically get the funds within a couple of days.
  • No credit check required.
  • Employers that offer this option usually don’t charge fees to employees.

Drawbacks

  • You may not qualify depending on how long you’ve been employed.
  • Not all employers offer this.
  • Some employers may charge a fee to cover additional accounting costs.

When to avoid a personal loan

Don’t commit to a personal loan if you do not have a clear idea of how you will be spending 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.

FAQs about personal loan alternatives

  • Credit cards, personal lines of credit and HELOCs are the best alternatives if you can pay the balances off quickly and don’t need all your funds at once.

    Cash-out refinance and home equity loans are best if you want a fixed rate, have plenty of home equity and want to spread your payment out longer.

    Retirement loans and salary advances are best if you don’t want to ding your credit and don’t plan to switch jobs anytime soon.
  • Avoid using a payday loan as an alternative. These loans come with APRs as high as 400 percent and should only be used as a last resort.
  • Any type of loan can help you build credit if you make payments on time over time. If you want to borrow money just to build your credit profile, a credit-builder loan may be a better option than a traditional personal loan, especially if you have bad or no credit.