8 Best Personal Loan Alternatives: Expert Advice

Best Personal Loan Alternatives, illustration of a dollar note
8 Best Personal Loan Alternatives

A personal loan is a money borrowed from a bank, credit union, or online lender. It’s a flexible type of loan that many people use instead of credit cards because the interest rates are generally lower and stay the same every month. However, suppose you’re looking for Personal Loan Alternatives because personal loans require a good credit score and can have significant fees. 

In that case, some borrowers look for other choices. If you don’t qualify for a personal loan or don’t want one, different options are available to you.

8 Best Alternatives to Personal Loans

While personal loans can be used for almost anything, they might not be the most affordable or convenient choice depending on your financial situation. To help you consider other loan and credit options that are available, we discuss various alternatives to personal loans below.

01. Payday Loan

A payday loan is a short-term loan, usually for $500 or less, that you’re supposed to pay back with your next paycheck. You have to show identification, income proof, and a bank account to get this loan. Payday loans can be an option for people with poor credit.

However, experts don’t recommend payday loans because they can be costly. Once you’re approved, the loan amount is quickly transferred to you. Then, you have to give the lender a signed check or permission to take money from your bank account.

The loan has to be repaid right after you receive your next paycheck. If you can’t pay it, the lender will take the loan amount plus interest from your account. This can be costly: payday loans charge a fee based on the amount borrowed, which is added to the total amount owed each time you don’t fully repay the loan. These fees can be as high as 300% APR or even more.

However, some credit unions offer an alternative to payday loans called PALs (alternative payday loans). PALs are designed to help you avoid getting a high-interest payday loan. These loans have terms ranging from one to six months and typically have lower fees. To apply for a PAL, you must be a credit union member for at least one month.

Pros and Cons of a Payday Loan

Easy application and approval processVery high interest rates
Fast access to cashShort repayment periods
Can save you money on overdraft feesCan result in chronic borrowing, which can lead to debt
Fewer requirements than other loansNot paying on time can result in additional fees and penalties
Can be an option for people who don’t qualify for traditional loansCan be predatory in nature
Can lead to a cycle of debt
Payday lenders target financially strapped customers
Might result in chronic borrowing, which can lead to debt
Pros and Cons of a Payday Loan

02. Credit Cards

Credit cards are a popular alternative to personal loans because of their convenience and flexibility. Credit cards can be a smart choice if you consistently pay off your balance in full every month. They provide immediate access to your credit limit, allowing you to make purchases and repay gradually or all at once. You can avoid interest charges by paying your balance within a month.

Unlike personal loans, credit cards offer a revolving line of credit. This means you can use as much credit as you need if you stay within the predetermined credit limit. You can decide how much to pay each month as long as you meet the minimum payment requirement. A secured credit card can help you establish credit if you have limited credit history. Simply provide a security deposit, and you’ll receive a credit limit based on that amount.

It’s important to note that credit cards generally have higher interest rates compared to personal loans. Therefore, paying off your credit card debt as quickly as possible is advisable to avoid accumulating excessive interest charges. When considering a new credit card, research options that align with your spending habits and offer rewards. Look for cards with lower annual percentage rates (APR) to minimize interest expenses. Remember, paying off the balance in full each month is crucial to prevent falling into credit card debt.

Pros and Cons of Credit Cards

Some credit cards offer a 0% introductory interest rate for a specific periodCredit cards often have higher interest rates compared to personal loans
Paying off your balance in full each month helps you avoid interest chargesEasy access to a line of credit can lead to debt accumulation if not managed properly
Credit card rewards programs allow you to earn rewards for eligible purchasesMaking a late payment can result in the cancellation of your introductory APR
Credit cards may provide additional protections, such as extended warranties
Pros and Cons of Credit Cards

03. Home Equity Loan or HELOC

Home equity loans (HEL) and home equity lines of credit (HELOCs) are borrowing options available to homeowners. These options allow you to use the equity in your home to obtain funds. Although they have some differences:

  • HELs have a fixed interest rate and require fixed monthly payments.
  • HELOCs have variable interest rates, which can affect your monthly payment amount.

Borrowing against your home equity can help consolidate high-interest debt. Still, it’s essential to repay the loan promptly to avoid the risk of losing your home. Typically, these options offer more extended repayment periods and significant loan amounts than traditional personal or debt consolidation loans. Additionally, they often come with lower interest rates. However, you need a certain amount of equity in your home to qualify for these options.

For homeowners, a home equity loan or HELOC can provide access to funding at a more competitive interest rate than personal loans. The interest rates tend to be lower since these loans are secured by the equity you’ve built in your home. Typically their rates are capped at around 19.99%, whereas personal loans can reach rates of up to 35.99%.

Although home equity loans and HELOCs are different products, they allow homeowners with significant equity to borrow against their homes. A home equity loan provides a lump sum of money and is considered a second mortgage. Which is repaid on a fixed schedule for 5 to 15 years, depending on the terms. On the other hand, a HELOC works similarly to a credit card, providing you with a line of credit that you can borrow from as needed, up to a specified limit. With a HELOC, you have a draw period where you can use the funds, followed by a repayment period with fixed installments to pay off the balance.

Suppose you decide to consider these alternatives to personal loans. In that case, it’s important to gather necessary information, such as your mortgage balance and property value, along with the standard documents required for loan or line of credit applications, such as personal identification and income information. During the approval process, the lender may reassess the value of your home. Once approved and after completing the required paperwork, typically including closing costs, you will receive the funds to use as you see fit.

Pros and Cons of a Home Equity Loan or HELOC

Offers more favorable interest rates compared to personal loansUsing your home as collateral means the lender can seize it if you default on the loan
You have the freedom to utilize the funds for various purposesClosing costs will typically include a percentage of the borrowed amount
Depending on your equity, you may have access to substantial borrowing limitsThe application process tends to be lengthier compared to other financial products
Pros and Cons of a Home Equity Loan or HELOC

04. Retirement Loan – 401(k) Loan

A 401(k) loan is a way to borrow money from your employer-sponsored retirement plan. Unlike personal loans, there’s no application process or credit score requirement to qualify for a 401(k) loan. This makes it a good option for borrowers who may not meet the standards of traditional lenders.

However, there are essential things to consider when taking out a 401(k) loan. Firstly, when you repay the loan, you’ll be taxed twice on the funds used. You must earn that money back first, as it’s subject to income tax before receiving it. When you withdraw the funds in the future, you’ll be taxed on them again. 

If you switch jobs while you still have an active loan, you’ll face additional taxes if you can’t repay the total amount within 90 days. In that case, the loan will be treated as a taxable distribution.

Just keep in mind that borrowing from your retirement account has drawbacks. You can only borrow from your current retirement plan, and the amount is limited to what you have vested. Also, leaving your job before the loan term ends means you have to repay the loan earlier than expected.

Pros and Cons of a Retirement Loan – 401(k) Loan

Quick and straightforward loan application process with online accessNot all plan providers offer 401(k) loans, limiting availability for some employees
Accessible loans even with poor creditDouble taxation on the interest paid on the borrowed amount
Interest paid on the loan benefits your retirement savingsMissed potential earnings by not keeping the money in your account
Borrowing limitations may restrict the full amount you need, limiting your options
Pros and Cons of a Retirement Loan – 401(k) Loan

05. Personal Line of Credit

If you’re unsure about the amount you need to borrow, a personal line of credit can be a good option instead of a personal loan. Personal lines of credit are flexible and don’t require collateral. Which is very similar to credit cards. This means you can borrow the money you need whenever you need it.

A personal line of credit might be more suitable than a personal loan if you anticipate needing to borrow multiple times. It works well for expenses such as home improvements, unexpected emergencies, or to manage changes in your income.

However, it’s important to note that personal lines of credit may come with additional fees you wouldn’t find with a credit card. Lenders might charge annual or monthly fees for maintaining your line of credit. 

Pros and Cons of a Personal Line of Credit

No need to determine the exact loan amount in advance; convenient access to fundsPotential fees for maintaining an open line of credit imposed by certain lenders
Greater flexibility in using funds compared to personal loansDifficulty qualifying for a loan for individuals with limited or bad credit history
Helps manage inconsistent income and expenses without frequent loan applicationsPotential temptation to overspend beyond your means with a line of credit
Pros and Cons of a Personal Line of Credit

06. Peer-to-Peer Loan

If you can’t secure a loan from a traditional lender, peer-to-peer (P2P) loans provide a viable alternative. These loans are funded by individual investors rather than banks or institutions. Lending marketplaces facilitate the loan approval process and connect eligible applicants with investors.

Since individual investors assess your application, they may be more understanding of credit history issues or consider unconventional indicators of creditworthiness. This makes P2P loans a feasible choice for borrowers who may not meet the requirements of traditional lenders.

Typically online lending platforms match you with an investor who can review available loans and choose which one to fund. If your loan is selected, you receive the funds. Still, you’ll be responsible for paying interest and possibly a loan origination fee.

The advantage is that interest rates on these loans can be relatively low, especially if you have excellent credit. Additionally, the application process is more straightforward than traditional banks or credit unions, and some lenders may offer more flexibility in repayment terms.

Pros and Cons of a Peer-to-Peer Loan

Quick funding within one business dayNo guarantee of loan funding on certain platforms
Access for lower credit scores in some P2P loansPotential origination fee of 1%-8% of the loan amount
Flexibility to delay payments without extra feesLonger review process for P2P loan applications compared to traditional loans
Pros and Cons of a Peer-to-Peer Loan

07. Salary Advance

A salary advance is when an individual borrows money from their employer to cover unexpected expenses. Instead of going to a traditional lender, they can access funds from their future paycheck.

Employers usually offer this loan option through payroll advance programs or on a case-by-case basis. While employers generally do not charge fees or interest on salary advances, there might be cases where an administration fee or interest is involved if they utilize a third-party lender. Repayment is typically made through installments, either through direct payments or deductions from future paychecks.

Suppose your employer doesn’t provide this type of loan. In that case, you can consider using paycheck advance apps. Which is a safer alternative to traditional payday loans.

Pros and Cons of a Salary Advance

Quick access to funds for emergencies through salary advancesNot all companies offer salary advances
Availability of paycheck advances even with a low credit scoreRepayment of the advance may lead to lower future paychecks
No fees or interest charged on paycheck advances from employersPersonal financial details may need to be disclosed to your employer
Companies may restrict paycheck advances to specific qualifying expenses
Pros and Cons of a Salary Advance

08. Borrowing from Family or Friends

Suppose you’re in need of money, and getting a loan is not a viable option. In that case, you can consider reaching out to a trusted family member or friend for financial assistance. This alternative allows you to borrow funds without any additional charges or interest. 

However, it’s essential to be cautious. Failing to repay the borrowed amount can strain relationships. Ensuring that your loved one only lends you an amount they can comfortably afford is crucial.

Pros and Cons of Borrowing from Family or Friends

Access to funds without interest or feesStrained relationships if the loan is not repaid
Potential flexibility in repayment termsPossible awkwardness or discomfort in discussing finances
Quicker and easier processDependency on the willingness and ability of the family member/friend
Opportunity to strengthen trust and bondPotential impact on the lender’s own financial situation
Pros and Cons of Borrowing from Family or Friends

It’s crucial to approach such borrowing arrangements with careful consideration and open communication. This helps you to minimize any negative consequences and preserve relationships.

When to Avoid a Personal Loan

If you’re unsure how to spend the money and will end up paying interest on borrowed funds, a personal loan might not be the best choice. It’s essential to be mindful of overspending and adjust your credit card usage if consolidating debts with a personal loan.

Research Before Borrowing

Before committing to a personal loan or any alternative, ensure you can handle the monthly payments. Use a personal loan calculator to estimate payments based on interest rates and loan terms. If you’re considering a credit card or variable rate product, it may be harder to estimate costs.

If you don’t need the money immediately, saving incrementally toward your goal can be better than borrowing. This way, you can avoid paying unnecessary interest.


In conclusion, when personal loans are not an ideal choice due to credit score requirements and fees. But several alternatives exist. These include payday loans, credit cards, home equity loans or HELOCs, 401(k) loans, personal lines of credit, peer-to-peer loans, salary advances, and borrowing from family or friends. Each option offers its own set of advantages and considerations. 

It is crucial to carefully assess your financial situation and needs to determine the most suitable alternative for you. By exploring these options, you can find a borrowing solution that aligns with your requirements and helps you achieve your financial goals.

Frequently Asked Questions and Answers (FAQs)

What is a salary advance?

A salary advance is when an individual borrows money from their employer to cover unexpected expenses. It provides quick access to funds, but the availability may vary depending on the employer.

How do credit cards serve as an alternative to personal loans?

Credit cards offer a revolving line of credit, allowing you to make purchases and repay gradually or all at once. They are convenient and provide immediate access to funds but generally have higher interest rates than personal loans.

Why would someone look for alternatives to personal loans?

Some borrowers seek alternatives to personal loans because they require a good credit score and may have significant fees.

Which loan is better than a personal loan?

There is no definitive answer to that question because loan option depends on your specific needs and circumstances. Each loan type has its advantages and considerations. So it’s essential to evaluate them based on your requirements.

What can I do instead of getting a loan?

You have other options that don’t involve taking a loan from a bank. For instance, you can ask a trusted friend or family member for financial help. Another option is to use a balance transfer credit card to pay off debt or get a cash advance from a credit card.

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