Alternative loans for fair credit borrowers

Kellye Guinan

Key takeaways

  • Personal loans generally have the lowest interest rates among alternative options.

  • If you don’t get approved for a personal loan, you can turn to a salary advance or a retirement loan (although both options have potentially severe drawbacks).

  • Regardless of which option you choose, make sure the payments fit comfortably into your budget to avoid interest accrual.

Personal loans can be a great option to finance a big purchase, a home renovation project or an emergency expense. They typically come with lower interest rates than credit cards while providing the same flexibility and comfortable repayment options.

But because personal loans are typically unsecured, you’ll need a strong credit score to qualify for the most competitive terms and rates, or a co-signer that meets this criteria. However, personal loans are not the only way to get the funds you need.

5 personal loan alternatives

Personal loans can be used to finance almost any expense, which is why they’re so popular among consumers. But if you can’t qualify for one or would rather avoid them altogether, these are a few alternatives you can explore.

1. Home equity loan or HELOC

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Bankrate insight

A home equity loan is best for smaller, predictable expenses, while a HELOC is best for longer, more expensive endeavors.

If you are a homeowner, a home equity loan or home equity line of credit (HELOC) can give you access to funding at a more competitive interest rate than a personal loan. That’s because they’re both a type of secured loan in which your home acts as collateral should you default on your payments, involving less risk from the lender.

Borrowers may consider a home equity loan or HELOC to finance larger expenses, generally those with a price tag of $10,000 or greater. Borrowers with significant home equity and a reasonably low debt-to-income ratio (DTI) may consider this a strong alternative to getting a personal loan.

Pros

  • Longer repayment terms than many personal loans, sometimes up to 20 years.

  • Generally more favorable interest rates than personal loans.

  • HELOCs offer flexible spending with interest only charged on the amount used.

Cons

  • More stringent qualifications than personal loans.

  • You must have at least 15 to 20 percent equity in your home.

  • Borrowers with a DTI over 35 percent may not be approved.

2. Credit cards

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Bankrate insight

Credit cards have higher interest rates than personal loans, but they are more flexible and can provide rewards.

Credit cards are a common alternative to personal loans. If you are able to plan and pay your balance in full each month, credit cards may be preferable.

Firstly, the opportunity to leverage rewards can be a draw for some borrowers. Secondly, credit cards are more flexible — once you are approved, you typically have immediate and ongoing access to your full line of credit.

Pros

  • A track record of timely payments can strengthen your credit.

  • Some cards provide rewards for each dollar borrowed, like cash back or points toward travel.

  • 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.

Cons

  • Interest rates may be substantially higher than for a personal loan if you need to carry a balance.

  • Carrying a balance can ding your DTI, making you less likely to qualify for other credit products.

  • You may be approved for more than you are comfortable paying back each month, and it can be easy to land yourself on a debt treadmill.

3. Personal line of credit

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Bankrate insight

A personal line of credit functions like a HELOC or a credit card. It’s best for unpredictable, long-term expenses like home improvement projects.

If you’re unclear about exactly what you’ll need 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 it.

If you suspect you’ll need to take from the funds multiple times, a personal line of credit may be more fitting than a personal loan. This type of credit is often suitable for expenses like home improvement projects, personal emergencies or to offset fluctuations in your income.

Pros

  • 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.

  • Secured lines may offer lower interest rates than unsecured personal loans.

Cons

  • 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.

4. Retirement loan

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Bankrate insight

Drawing from your retirement savings shouldn’t be a first-choice option, but if you have low credit, it can give you the cash you need.

People who have saved money in an employer-sponsored retirement plan may be eligible to borrow from themselves in the form of a 401(k) loan. This is generally a good option for borrowers with less-than-stellar credit since no credit check is required.

Be aware that borrowing from retirement comes with some big drawbacks — chiefly that borrowing is restricted to current retirement accounts and limited by how much you have vested in the account. Also, be aware that if you leave your job before the loan term is up, you may be required to repay ahead of schedule.

Pros

  • Reasonably quick access to lump sums of cash.

  • More relaxed borrowing requirements than many personal loans.

  • Unlike withdrawals from a retirement account, 401(k) loans do not tend to include immediate taxes or penalties.

Cons

  • Limited to $50,000 or 50 percent of vested balance.

  • Retirement accounts from old employers are not eligible for borrowing.

  • Loans not repaid on time can turn into a distribution, with taxes and penalties attached.

5. Salary advance

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Bankrate insight

If you have low credit and are tight on cash, a salary advance could be a good way to get the cash you need. However, not all employers offer this option, and some may charge fees.

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

While some employers may deduct the funds automatically from your next paycheck, others allow a longer repayment schedule, which can be beneficial if you’re tight on cash.

Pros

  • You typically get the funds within a couple of days.

  • Flexibility to use the funds as you see fit.

  • No credit check required.

Cons

  • Limited to small amounts.

  • You may not qualify depending on how long you’ve been employed.

  • Not all employers offer this, and some may charge fees.

The bottom line

Before committing to a personal loan or an alternative, be sure you can comfortably handle the monthly payments. A personal loan calculator can help you estimate your payment based on interest rates and the loan term. In the case of a credit card or other variable rate product, you may not be able to estimate this cost as easily.

If you don’t need money urgently, consider saving incrementally toward the sum you need rather than borrowing. This, in turn, could save you hundreds — or even thousands — worth of interest in the long run.

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