Alternatives to bad credit loans that can save you money

There are several ways to get cash if you are uncomfortable taking out a loan due to bad credit. It may be better to use a credit card, ask a friend or family member for help, or tap your 401(k) for money. If you have a high medical bill or a high electricity bill in the winter or summer, you may want to set up a payment plan instead of borrowing extra money.

You may not have access to cash as quickly and may even have to jump through some extra hoops if you opt out of a bad credit loan. However, you can save yourself hundreds, if not thousands, of dollars in interest charges and fees if you choose an alternative to a bad credit loan.

8 Alternatives to Bad Credit Loans That Can Save You Money

While bad credit loans offer quick access to cash if you’re in financial trouble, there can be plenty of other options that come with lower costs. Some options may come at no cost if you have a good relationship with a friend or family member. Knowing the alternatives to bad credit loans can save you money in the long run.

1. Use a credit card

There are several credit cards for bad credit that can help you get the money you need in a tight situation. The rates are much lower than payday or car loans, and you can make minimum payments on the amount you borrow until you have the money to pay off the balance.

Although credit card interest rates are higher than most personal loans, you are not locked into a fixed payment for one to seven years, like with a personal loan. You can avoid paying interest if you can pay off all or most of your monthly balance.

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 lending matches you with groups of investors. They may be willing to share the risk of lending to a borrower with bad credit with other investors, which a single bank or lender cannot do.

Peer-to-peer lenders can offer lending options to borrowers with a score as low as 600. The qualifying rules may be less strict than other types of loans and can be funded just as quickly as a personal loan. As with other bad credit loans, your interest rates and fees will be higher the lower your credit score is.

3. Use a mortgage loan or HELOC

If you own a home and have some equity in it, you can convert some of your equity into cash with a mortgage loan or a home equity line of credit (HELOC). You normally need a credit score of at least 620 to qualify, and the rates are significantly lower than credit cards and payday loans.

A mortgage loan works like a personal loan. 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 money when you need it. You can pay off your HELOC balance and reuse the line of credit during the “draw period,” which usually lasts ten years. After this period has passed, the HELOC balance will be paid off in installments.

Both types of loans are considered second mortgages, meaning you have two monthly mortgage payments. Your home is collateral for mortgage loans, or HELOCs, and the lender can foreclose on your home if you can’t pay it back.

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

A buy now, pay later loan lets you pay off debt by breaking large purchases into more affordable installments. You can normally pay off your interest-free balance in four monthly installments.

You can use BNPLs to pay for materials for emergency repairs, replace an appliance, or finance another major purchase. Most retailers offer BNPLs as part of their payment options.

A word of warning: the convenience of these apps and tools can easily make you go over your budget. Multiple loan payments can be difficult to manage and can result in a missed payment that further damages your credit.

5. Request a payment plan

Depending on the costs, you can request a repayment plan instead of applying for a new loan. 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 real 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 because there’s always a chance that your relationship will be strained if you can’t pay it back. Be open and communicative with whoever lends you the money, and set up a payment contract to hold you accountable 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. Small gestures like these can be enough to get you through a difficult financial situation.

7. Borrower 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 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 typically 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 a longer approval process (sometimes as long as 45 days) to get your money. 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.

Take steps to improve your credit score whenever you can. Avoid maxing out your credit cards and pay all your credit bills on time. Have your situation assessed by a credit counselor if you’re not sure which way to go, or consult a debt counselor if you don’t have the income to repay your debts.