7 Alternatives to a Personal Loan

Personal loans can be used for a number of purposes, including emergencies and large purchases. However, depending on your financial situation, a personal loan might not be a good fit.

If you’re not sure that a personal loan is the right fit for you, there are alternatives. Let’s take a look at seven alternatives to personal loans and provide information that can help you figure out what might work best for you depending on your circumstances, such as whether you have bad credit or need funding fast.

Key Takeaways

Personal loans might be too expensive or might not be a good fit, so a borrower might need alternatives.
Some alternatives can be easier to manage than personal loans, in addition to providing faster funding.
Consider the pros and cons of personal loan alternatives before making your decision.

7 Personal Loan Alternatives
	Description of Alternative	Who It’s Best for
1. Credit Card	Line of credit, accessed by card, that offers access to funds on a rolling basis. You may get a promotional rate if you have good credit.	Someone who wants to borrow at need and who can pay off the balance before interest is charged.
2. Line of Credit	Provides access to funds on a rolling basis, up to a limit. However, you often get access to higher limits than with a credit card.	Those who need access to a higher limit or want a bigger lump sum at a lower rate of interest.
3. Peer-to-Peer (P2P) Loan	Investors fund the loan rather than a single lender. The borrower might need to wait until the loan is fully funded to access the capital.	Someone having trouble qualifying for a traditional loan and who can wait extra time to receive the money.
4. Home Equity Loan or Home Equity Line of Credit (HELOC)	Access to funds based on the equity you have built in your home. Can be a lump sum or a rolling line of credit.	Those who have equity built up in their homes and want a lower rate, and who are likely to avoid foreclosure.
5. Payday Loan	Loan offered based on your upcoming payday. Usually short-term with a high interest rate.	A person who needs money quickly and temporarily and is likely to repay the loan within a few weeks.
6. Retirement Loan	Borrow the money from a retirement account instead of from a traditional lender. Rates are usually lower.	Someone who expects to be in a job for an extended period and can repay the loan within five years.
7. Salary Advance	Receive a portion of your next salary payment in advance, usually in agreement with your employer.	A borrower who has an employer that offers this option at a low cost or even for no cost.

1. Credit Card

A credit card functions as a line of credit. Normally, you have a credit limit and rolling access to your credit line. As you make payments, you “free up” room on your credit card for additional purchases.

With this revolving line of credit, you only borrow as you need the money. You have the option to pay off your balance each month, or you can pay down your balance over time, depending on your situation.

It’s important to note, though, that when you carry a balance from month to month, you’ll pay an interest fee. Depending on your credit situation, this fee can be higher than what you would pay with a personal loan. However, if you can pay down your balance regularly, you’ll be less likely to need to worry about interest.

Credit cards also offer access to cash advances. So, if you need cash rather than simply paying for items with your credit card, it’s possible to receive an advance based on how much available credit you have. However, there is usually an additional fee associated with a cash advance, and some credit cards charge a higher rate of interest.

Finally, for those with good credit, it’s possible to get a promotional interest rate that can be as low as 0%. If you qualify for a 0% annual percentage rate (APR) on a credit card for up to 24 months, you might be able to get a better deal than you would with a personal loan. As long as you can pay off your balance before the end of the introductory period, a credit card might be a better fit for your finances.

Pros and Cons of Credit Cards

Pros

You might be eligible for a 0% APR for a set period of time.
Potential to earn rewards and cash back, depending on the credit card.
Depending on the credit card, you might be able to take advantage of purchase and fraud protection.
Avoid paying interest if you pay off your balance each month.

Cons

Interest rates are generally higher with credit cards than with personal loans.
If you don’t have a plan to pay off your balance, you could end up overwhelmed by debt.
Late payments and other issues can lead to the cancellation of your introductory APR.
Some credit cards add all the interest you would have paid during the promotional period if you don’t pay off the amount during the introductory period.

2. Personal Line of Credit

If you have a personal line of credit, it functions similarly to a credit card. You might even have a card to access your credit. However, a personal line of credit is usually connected to your bank, and you might need to connect it to a checking or savings account.

As with a credit card, your money is available on a revolving basis, and you can borrow (and repay) as needed. However, you usually have a lower interest rate than with a credit card, and might even have a lower interest rate than with a personal loan.

Pros and Cons of Personal Line of Credit

Pros

Easily access funds as needed, rather than trying to decide on how much you need for a lump sum.
Have a smooth cash flow and handle emergencies without applying for a new loan each time.
Use the funds for more flexible purposes than personal loans.

Cons

You might be subject to an ongoing fee to keep your line of credit operational.
There’s a potential to spend more than you can afford when you have a personal line of credit.
It can be difficult to qualify without good credit.

3. Peer-to-Peer (P2P) Loan

A peer-to-peer (P2P) loan is usually offered through a collection of investors rather than just one lending institution. You might go to a website, express your funding need, and then multiple investors will decide how much they will put toward your funding need.

If you can’t qualify with a traditional lender, you might be able to get funding through a P2P platform. Investors might be willing to take a chance on you, even with poor credit, for the potential for higher returns in the form of a higher interest rate.

However, it can take longer to have your loan funded, and you might not get the total amount you ask for. This can set you back as you attempt to access the money you need.

Pros and Cons of Peer-to-Peer Loans

Pros

You may be able to get a loan, even with poor credit, when a traditional lender won’t provide the funds.
Once the loan is approved, you might be able to get the money quickly.
Depending on the platform, you might be able to avoid some late fees.

Cons

Not every platform guarantees your loan will be funded, so if you don’t get enough backers, you might not get the money you need.
Origination fees can be high, up to 8% of your loan amount.
While funding can be fast once you’re approved, the approval process can take days or even weeks.

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

If you own your home and have built up equity in it, you might be able to borrow against that equity for what you need. A home equity loan is usually a lump sum, and if you want to borrow again, you need to submit a new loan application. On the other hand, a home equity line of credit (HELOC) operates similarly to a personal line of credit in that you can access what you need as you need it and only pay interest on what you use.

Depending on the situation, you might have to go through a home appraisal to determine the size of your loan or line of credit. It might take longer to get approved for a home equity loan or a HELOC than with a personal loan due to the paperwork. However, many lenders offer lower rates on a home equity loan or a HELOC than they do for a personal loan.

Pros and Cons of a Home Equity Loan or a HELOC

Pros

Funds can be used for almost anything, including education costs.
You might be able to access a higher amount, depending on the equity you have built up.
Interest rates are generally lower than with personal loans.

Cons

You’re at risk of foreclosure if you can’t make payments.
There are usually closing costs and other fees associated with a home equity loan or a HELOC.
It can take weeks to go through the process and receive your funding.

5. Payday Loan

Payday loans are notorious for high interest rates and fees. However, for those who need fast funding and can potentially pay off their debt in a couple of weeks, they might provide immediate relief in case of an emergency.

Generally, to access payday lending, you need to have a checking account and be able to show that you receive regular pay from a stable job. Payday lenders are often willing to extend the term of your loan, but you usually need to pay a fee. As a result, payday loans can potentially result in you being stuck in a cycle of high-interest debt. Payday lending is particularly predatory to low-income communities, domestic violence survivors, and other vulnerable groups.

For the most part, these loans are best avoided. However, if you are experiencing a very temporary cash crunch and can repay the loan without extending, they can be acceptable in a pinch.

Pros and Cons of Payday Loans

Pros

Payday loans are often available to those with poor credit.
You often receive approval quickly and can get funding as early as the next business day.

Cons

Interest rates and fees are very high.
It’s easy to renew payday loans (pay a fee), so borrowers can quickly get trapped in debt.

6. Retirement Loan

It’s possible to borrow against your retirement account as long as your employer allows this type of program. With a retirement loan, you can take money from your account with the understanding that you will make regular payments, with interest, back into your account. You usually have five years to repay your retirement loan.

Understand, though, that if you leave your job before the loan is repaid, you will need to pay off the balance within 60 days. Otherwise, the remainder will be considered an early withdrawal, subject to penalties and taxes.

A retirement loan can make sense for someone who wants to repay themselves and who reasonably expects to remain in their job for five years.

Pros and Cons of Retirement Loans

Pros

Possible to get a loan, even with bad credit.
Interest paid on the loan is returned to your retirement account, rather than going to a lender.
It’s possible to receive money quickly, depending on the employer’s policies.

Cons

Your loan balance becomes due if you leave your job or are laid off.
There are often limits on borrowing, and you might not have access to the full amount you need.
Borrowers miss time in the market, resulting in an opportunity cost for the future.

7. Salary Advance

Rather than getting a payday loan or borrowing from your retirement account, you might be able to receive a portion of your paycheck early. However, these programs depend on your employer’s policies. Some employers offer these programs as an advance program or allow you to talk to the human resources department on a case-by-case basis.

Depending on the program, you might repay the advance a little at a time or all at once. There might also be administrative fees and other costs. However, some programs don’t cost anything and can be a good alternative to a payday loan.

Pros and Cons of Salary Advances

Pros

Fast way to get the money you need, especially for emergencies.
You might be able to access these programs even with a low credit score or no credit history.
Some programs come without fees or interest costs.
You might be able to access the advance via an easy-to-use app.

Cons

Future paychecks can be lower since you’ll be making payments on the advance.
Some programs come with limited uses, such as medical bills.
Depending on the situation and program, you might have to let your boss know details about your finances.
Some programs come with administrative fees and other costs.

What Is the Most Popular Alternative to a Personal Loan?

Without any concrete data, it’s difficult to determine what is the most popular alternative to a personal loan. However, credit cards are perhaps the most widely used option that can serve as an alternative source of funding. Not everyone who acquires a credit card does so as an alternative to a personal loan, though.

How Can You Increase Your Chances of Personal Loan Approval?

You’re more likely to get approved for a personal loan if you have good credit and can show a stable income. Lenders want to see that you’re likely to repay the loan, and that you have the means to make payments.

What Type of Loan Is the Easiest to Get?

Whether a loan is easy to get depends on a number of factors, including your credit and income situation. For those with good credit and income, a personal loan is relatively easy to get. If you have poor credit, it might be easier to get a payday loan or a cash advance. Home equity loans or HELOCs can be easy to get for those with a lot of equity built up in their homes.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

The Bottom Line

Personal loans can offer flexible funding options, but they aren’t always available for everyone. If you don’t qualify for a personal loan, or if you don’t feel like the personal loan meets your circumstances, you can get an alternative, such as a credit card, a HELOC, or even a salary advance.

Carefully consider your situation and your funding needs as you determine the best way to get your funding.