Alternative loans for honest borrowers

There are several ways to get cash if you have bad credit and don’t want to take out a loan. There are cheaper alternatives for almost every scenario that are usually easier to qualify for than a traditional personal loan.

For example, you might be better off using a credit card, asking a friend or family member for help, or tapping your 401(k) for cash. If you have a large medical or utility bill, you may want to set up a payment plan instead of borrowing additional money.

You may not have access to cash as quickly and may even have to jump through some extra hoops as you compare personal loan rates and opt out of a bad credit loan. However, some options may mean that you pay less interest.

8 personal loan alternatives for borrowers with bad credit

While bad credit loans offer quick access to cash, other options can offer lower costs and – in some cases – comparable speed.

Having less-than-stellar credit doesn’t always mean you’re stuck with often-high, bad credit interest rates. Knowing all the alternatives available to you can help you make the most informed and cost-effective decision.

1. Use a credit card

Credit cards for bad credit can give you the money you need in a tight situation. The rates are much lower than payday or car loans, although they can be comparable to a bad credit personal loan.

Credit cards are more flexible than installment loans in two ways (such as payday loans, car loans, and personal loans). First, you can only use the amount you need, rather than borrowing all at once.

Second, an installment loan requires you to make a fixed monthly payment for both interest and principal. A credit card allows you to make minimum payments on the amount you borrow until you have enough cash to pay off the balance. But if you get into the habit of paying only the minimum amount, it can lead to interest accruing quickly, so avoid this if possible.

You can avoid paying interest on a credit card if you can pay off your monthly balance, making it an ideal option for smaller expenses.

2. Consider peer-to-peer lending

Getting a loan from an individual or a credit union can be challenging if you have bad credit and don’t meet that specific lender’s requirements. Peer-to-peer lenders match you with loans funded by groups of investors. Peer-to-peer lending is easier to get approved than traditional lending. Investors may be more willing to share the risk of making loans to applicants with low credit levels.

While the average personal loan requires a credit score between 610 and 640, peer-to-peer lending can offer loans as low as 600. Funding times are often comparable to what personal loan lenders offer. However, as with other bad credit loans, your credit score determines how low your rates and fees will be.

3. Use a mortgage loan or HELOC

If you own a home with 15 to 20 percent equity, you can tap into that equity with a mortgage loan or a home equity line of credit (HELOC). To qualify, you typically need a credit score of at least 620. The rates are significantly lower than credit cards and payday loans.

A mortgage loan works like a personal loan, but with a much longer repayment period. You get paid in one lump sum and make fixed payments over a set period, usually between 15 and 30 years.

A HELOC works more like a credit card and gives you access to your money as needed during the “draw period,” which typically lasts between 10 and 15 years. During this period you can borrow what you need (up to a limit) and have a repayment term of approximately 20 years.

Both types of loans are considered second mortgages, meaning you have two monthly mortgage payments. And you must put your house up as collateral. While this makes them more affordable and easier to get approved for, it also means the lender can foreclose on your home if you don’t make the payments.

4. Consider using a buy now, pay later (BNPL) loan

A buy now, pay later loan is a short-term repayment plan that allows you to split purchases into four monthly installments.

Most online retailers offer BNPL options. Numerous mobile and desktop apps host thousands of retailers offering the financing option.

Most BNPL apps and services do not require a credit check, so those who have no credit history or a very low score can still qualify. However, some of these apps have interest rates that are astronomically high if you miss a payment.

Plus, the convenience of BNPL can make it easy to spend beyond your budget.

Only those who have good control over their finances and spending habits should consider purchasing multiple products at once. Multiple debt streams can become difficult to manage. Missed payments can lead to credit damage if the company reports to the three credit bureaus.

5. Request a payment plan

Depending on the costs, you can request a payment plan to spread out the payments instead of taking on more debt. You may qualify for low or no interest payment plans to pay for:

• Energy bills.
• Medical expenses.
• Dental work.
• Taxes.

Utilities may extend your due date or allow you to pay it over several months. Ask about ‘level pay’ options that give you predictable payment for electricity, water or gas bills. This can help you avoid high bills during high-use seasons such as winter and summer.

Medical and dental practices often offer options to spread your payments over several months. If you are behind on federal, state, or estate taxes, contact your tax authorities to discuss payment options.

6. Borrow from friends or family

Financial challenges and speed bumps affect many people, and friends and family are likely to understand your challenges the most. It can be scary to ask loved ones to lend you money. There’s always a chance that your relationship will become strained if you can’t pay it back.

Be open and communicative with the person lending you the money. Set up a payment contract so that you are responsible for the monthly payments.

It’s important to know that you are not alone if you are struggling financially. Even if family or friends can’t immediately lend you the money you need, they may be able to support you in other ways.

Ask for help with childcare if you temporarily need a second job or a part-time job. Or maybe they can prepare extra meals for you so you can reduce your grocery bill between paychecks. This type of help can be enough to get you through a difficult financial situation.

7. Borrow against a retirement account

If you have money in a retirement account such as a 401(k) through your employer, you can borrow against a portion of the value. With a 401(k) loan, you don’t have to qualify based on your credit, and the rates are usually very low. You must repay the loan within five years and the payment will be deducted from each paycheck until it is paid in full.

You could pay taxes or penalties if you leave your job before the balance is paid off. You also cannot borrow more than $50,000 or 50 percent of your acquired account balance.

8. Consider refinancing your home with a cash-out

A cash-out refinance involves borrowing more than you currently owe and pocketing the difference in cash. Mortgage interest rates are usually much lower than other types of bad credit loans. You may even qualify for an FHA cash-out refinance with a credit score as low as 500, as long as you have more than 20 percent equity in your home.

Closing costs are more expensive because you borrow more, and you have to go through an approval process that can take more than a month. Like mortgage loans and HELOCs, your home is the collateral for this type of refinancing, putting you at risk of losing your home if you default.

it comes down to

It is best to consider the alternatives to bad credit loans to avoid paying exorbitant interest rates and closing costs. If you don’t need the money urgently, take some time to weigh the pros and cons of each type of bad credit loan and the alternatives.

Regardless of your choice, always take steps to improve your credit during the process. This may allow you to qualify for a cheaper loan option later.