Top 3 Alternatives to Installment Loans

Installment loans are a useful tool for anyone looking to finance major expenses, finance a renovation, or get quick access to cash. The money is paid out in a lump sum and paid off in equal monthly installments (installments). While they can be used for almost any legal fee, the immediate repayments and interest rates can make them an expensive financing choice, especially for those with low credit levels.

If an installment loan isn’t right for you and you need the money quickly, consider the alternatives, such as a personal line of credit, a credit card, or a home equity line of credit.

When should you consider an alternative to installment loans?

While there are different types of installment loans that can be used for different expenses, this doesn’t necessarily mean they are the best option for every situation. For example, most installment loan lenders require individuals to have at least good credit and meet an annual income requirement. If you don’t meet most of the lender’s minimum requirements, you may want to see if you can delay taking on debt and work on improving your credit score.

Although some companies serve borrowers across the credit spectrum and approve those with poor credit, these loans often come with high interest rates and fees. This means that if you can’t make your monthly payments, your score will suffer and you’ll end up paying thousands of dollars in interest alone.

You’ll also want to consider an alternative if you’re financing an ongoing, major project. With an installment loan you can borrow a maximum of a certain amount. If you find yourself in a situation where you have borrowed too little or too much, you will be stuck with the balance until it is paid off in full. However, some lenders allow borrowers to take out a second loan after making payments for a certain period of time.

Lines of credit

Not every lender offers personal lines of credit (PLOC), especially if you’re looking for an unsecured option. Nevertheless, they are a valuable alternative to a personal loan. They offer more flexibility than a personal loan and often have a lower interest rate than a credit card.

A PLOC is ideal for larger projects or long-term expenses and works in the same way as a credit card, but with much lower interest rates. With a PLOC, you can borrow what you need, when you need it (up to your credit limit) during the draw period and only have to make interest payments. When your draw period ends, your line of credit becomes the equivalent of a term loan and you are then responsible for making monthly payments.

However, you may need to provide some form of collateral, especially if you are borrowing a larger amount. Collateral is an asset or asset that supports the loan balance. Lenders use collateral to minimize risk for larger loan amounts or to secure loans for borrowers with bad credit. If you default on the balance or do not make payments over a period of time, your collateral may be seized to pay the overdue payments.

With a PLOC, the details may vary per lender. Still, you can expect to use a savings account, investment account, or certificate of deposit (CD) as collateral. Although unsecured lines of credit are less common, some lenders may offer them to the most creditworthy individuals.

Advantages

• Flexible spending.
• Only pay interest on the amount you use during the draw period.

Cons

• Fewer options for lenders.
• Collateral may be required.

Credit cards

Credit cards can be difficult to manage if you don’t have a tight budget or a solid financial plan. They often have higher interest rates than loans or other financing options, making it easier to accumulate large amounts of high-interest debt. However, when used responsibly and with positive payback, a credit card can offer exclusive and unique benefits such as cash back and travel rewards.

Before taking out a credit card, conduct a financial audit to create a realistic credit card budget to avoid overspending. The high interest rates that come with most cards only become a problem if you don’t make the payment at the end of your billing period.

The lower your balance at the end of each month, the less interest you pay. Ideally, you’ll pay each monthly payment on time and in full, but if there are one or two months where money falls short, make at least the minimum monthly payment to avoid interest accruing. While it may be helpful to use it once or twice, it is not recommended to only make the minimum payment as a long-term solution as this will cause your monthly payments to skyrocket.

Keep in mind that credit cards also carry their fair share of fees, including an annual fee. This can range from $99 per year to $600 per year. Typically, the best rewards or travel cards charge higher annual fees and are only intended for customers with excellent credit. Additionally, you must spend a certain amount to fully benefit from the card’s benefits. So make sure that this amount does not lead to overspending.

Advantages

• Membership benefits such as cash back or travel rewards.
• No interest if you pay off the amount spent before the billing cycle ends.

Cons

• High interest rates compared to personal loans.
• Can be associated with high annual costs.

Home equity lines of credit

A home equity line of credit (HELOC) is the best option if you have built up equity in your home and need to cover a series of major expenses. For example, larger home renovation projects or college-related expenses, such as housing costs or tuition, are best for a HELOC. And if you use the money to improve, buy or build your home, the interest is tax deductible.

The amount you can take out depends on the equity you have in your home, although most lenders allow you to take out a maximum of 85 percent. Like lines of credit, HELOCs allow you to withdraw what you need when you need it during the draw period, which is typically 10 years.

The major disadvantage of a HELOC is that your home serves as collateral for the line of credit. So if you can’t make the payments, your lender has the legal jurisdiction to pursue foreclosure to pay the past due balance. However, the foreclosure process is not immediate and your lender may be willing to negotiate or extend alternative payment plans, but it is a risk.

Because HELOCs are secured debt, rates and fees are typically lower than other loans and financing options. Plus, they’re generally easier to qualify for, so people with less-than-stellar credit have a better chance of approval. Still, you must meet income and credit score requirements to get the lowest rates.

Advantages

• Possibility to deduct interest for certain costs.
• Some lenders only require interest payments during the draw period.

Cons

• Risk exclusion if you cannot pay.
• Valuation of your home and other costs may be necessary.

it comes down to

Installment loans can be a useful option if you need to cover large expenses, but they are not as flexible as other options, such as a credit card or a PLOC. Whichever route you choose, however, always compare multiple options and weigh the lender’s minimum requirements against your financial health before signing up.