5 Alternatives to a Personal Loan
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A personal loan can be taken out for a variety of reasons. For some people, a personal loan is one way to cover a financial emergency, such as unexpected medical costs. For others, a personal loan can be used to pay for a wedding or car repairs.
But how do you decide whether or not a personal loan is right for you? One way to know is by understanding your options. Here’s a look at alternative options to a personal loan.
5 alternatives to taking out a personal loan
If you need money and don’t want a personal loan, there are options available. The viability of these options will depend on your credit history, finances and needs.
Introductory 0% APR credit card
Credit cards can come with high interest rates that can make it difficult to repay your debt. However, credit card companies sometimes offer a promotional 0% APR period to lure in new credit card users. Cards with this kind of promotion could be a good option if you need access to cash and plan to pay back your balance in a short period.
“If you have excellent credit, instead of a personal loan, consider applying for a credit card with an introductory 0% APR on purchases,” said Beverly Harzog, a consumer finance analyst and credit card expert at U.S. News & World Report. “You can get a 0% APR on purchases for about 12 to 18 months. During that time, you can ‘borrow’ money for a purchase and make monthly payments without paying any interest. But beware, this intro rate ends, so this is a good choice if you can pay the bill before the interest rate goes up.”
Going this route requires careful planning. It’s a matter of figuring out how much you need and how quickly you can repay that amount. If the timing works out, then you can borrow a large sum for almost nothing. However, if the plan doesn’t work out, you will be at risk of repaying your debt at a higher interest rate than you may have gotten on a personal loan.
Home equity loan or home equity line of credit
If you have equity in your home, there are a couple of options to borrow against it — and with a low interest rate. A home equity loan is when you borrow a certain amount of money against your equity and repay the loan over a certain period of time. A home equity line of credit (HELOC) works similarly, except that it functions more like a credit card, where you borrow only what you need.
Since the collateral on a home equity loan and HELOC is your home, the interest rates are much lower than on a personal loan. The repayment period is also longer than a typical personal loan. The drawback is that your debt is tied to your home; if you default, you could lose your home.
If you have investments, some banks will let you borrow money by using the investments as collateral. This could be stocks, bonds or a certificate of deposit.
The value of the investments is a big factor on whether you can use it as collateral and how much you can borrow. However, since the loan has collateral, the interest rate will be far lower than that of a personal loan. Credit history and income will also be major factors. In the case of these securities loans, there will be a lower interest rate than a personal loan, but there is the risk of losing the investment if the loan goes into default.
Retirement account loan
While investments used for securities loans are typically done with after-tax dollars, retirement accounts such as a 401(k) will usually consist of pre-tax dollars. For that reason, borrowing from the account is an option that comes with a minimal amount of costs, but there are some caveats when borrowing the money.
The biggest drawback of borrowing on a 401(k) or IRA is a possible tax penalty. If the loan borrowed is not paid back in a timely manner, it could be considered a withdrawal and subject to a 10% penalty. Also, during this time of repaying the loan, individuals may find themselves setting aside less money in their 401(k) and they would also be missing out on interest the money borrowed could be accruing during this time.
IRAs cannot be borrowed against, but depending on the timing, a person with this kind of retirement account could remove funds from the account without issue.
“If individuals have a traditional IRA, once every 12 months they can pull monies out without tax and penalty as long as assets are replaced within 60 calendar days,” said Dennis Nolte, vice president of Seacoast Investment Services in Winter Park, Fla.
Borrowing from friends or family
Not everyone has a rich uncle or friend they can borrow money from. But if you do, they might not be a bad option.
However, keep in mind that money is a reason relationships fall apart. A 2017 study showed that 1 in 3 people said they would end a friendship over a $100 or less, with 36% of the people in the study saying the amount would be between $100 and $500.
If you borrow money from a friend or family member, make sure you set up a repayment agreement. That is, both parties should know when the debt will be paid back in full and whether or not you’ll repay the amount with interest. You should also both understand what will happen if you’re unable to repay the debt. That way, you can avoid unnecessary drama if repayment goes south.
Personal loans may still be a viable option
These alternatives may be ideal for those who have the means to make use of the options, but that’s not the case for everyone.
Fortunately, for those who can’t make use of these alternatives, personal loans are widely available. You can apply online and receive an approval within minutes and funds could be deposited into your account within a few business days. Once you have those funds, it’s up to you on what you want to spend it on whether it be an emergency, home repairs, debt consolidation, or another large expense.
Personal loans may not require immaculate credit scores. A score in the mid-600s may be enough to receive approval depending on other factors, such as your income. The amount borrowed can also vary, starting off at $1,000 and going upwards to $50,000 or more depending on the lender.