If you have bad credit and don’t want to take out a loan, there are still ways to get cash. Low-cost alternatives exist for almost every scenario, and many of them are easier to obtain than a traditional personal loan.
For example, you might be better off using a credit card, asking friends and family for help, or drawing on funds from your 401(k). If you have high medical or utility bills, you might be able to work out a payment plan instead of borrowing additional money. These alternatives might take a little more effort and take a little longer to fund, but the interest savings might be worth it.
8 Personal Loan Alternatives for Borrowers with Bad Credit
Just because your credit score isn’t that great doesn’t necessarily mean you’re locked into high bad credit loan interest rates. There may be bad credit loan alternatives available that offer lower costs and, in some cases, similar speeds.
1. Use a credit card
Credit cards for bad credit may provide you with the funds you need when you’re in a pinch. Interest rates are much lower than payday loans or auto loans, but they may be on par with personal loans for bad credit.
Credit cards are more flexible than installment loans in two ways: First, you can spend only the amount you need, rather than borrowing a lump sum.
Second, with an installment loan, you have to make set payments each month towards both interest and principal, whereas with a credit card, you can make minimum payments towards the amount you borrow until you have the cash to pay off the balance.
If you get into the habit of only paying the minimum, interest can add up quickly, so avoid this if possible. If you can pay off your balance each month, you can avoid paying interest altogether on a credit card, making them an ideal option for smaller expenses.
Who is a credit card suitable for?
For people who need to cover small expenses and are disciplined enough to spend only what they can pay off in full each month, a credit card is a better choice.
2. Consider Peer-to-Peer (P2P) Lending
If you have poor credit and don’t meet a particular lender’s requirements, it can be difficult to get a loan from a bank or credit union. Peer-to-peer lenders introduce you to loans funded by a group of investors. P2P loans may be easier to get approved for than traditional loans. Investors may be more willing to share the risk of lending to applicants with poor credit.
The average personal loan requires a credit score of at least 620, but peer-to-peer loans may offer loans with scores as low as 600. Loan terms are roughly the same as those offered by personal loan lenders, but as with any bad credit loan, your credit score will determine how low your interest rate and fees will be.
Who is a P2P loan suitable for?
P2P loans are a good choice for people who want an installment loan but can’t get financing from a traditional lender.
3. Take out a mortgage or HELOC
If you own a home with enough equity, you can use that equity to get a home equity loan or home equity line of credit (HELOC). You usually need a credit score of at least 620 to qualify, but the interest rates are significantly lower than credit cards or payday loans.
A home equity loan is similar to a personal loan but has a much longer repayment period: You pay it off in a lump sum and make fixed payments over a set period of time, usually between 15 and 30 years.
A HELOC works like a credit card, allowing you to access funds as needed during a “draw period” that typically lasts 10 to 15 years. During this period, you can borrow up to your limit when you need it, with a repayment term of roughly 20 years.
Both types of loans are considered second mortgages, which means you have two monthly mortgage payments, and they require your home to be used as collateral. This can make the loan more affordable and easier to approve, but it also means that the lender could foreclose on your home if you don’t make payments.
Who are home equity products suitable for?
These options are better choices for those with a significant amount of home equity.
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 pay for your purchase in four monthly installments.
Most online retailers offer BNPL options, and many mobile and desktop apps have thousands of retailers offering financing options.
Most BNPL apps and services don’t require a credit check, making them suitable for people with no credit history or very low credit scores. However, be aware that some of these apps can charge very high interest rates if you miss a payment. And the convenience of BNPL can often lead to you spending beyond your budget.
Only those with a strong grasp on their finances and spending habits should consider buying more than one item at a time. Having multiple debts can be difficult to manage, and missing payments could damage your credit if the company reports you to the three credit bureaus.
Who is a BNPL loan suitable for?
BNPL loans are ideal for consumers who want to split their purchases into smaller payments and avoid the high interest rates associated with credit cards.
5. Request a payment plan
For some expenses, you may be able to apply for a payment plan that spreads your payments out rather than increasing your debt. You may qualify for low- or no-interest payment plans for the following payments:
- Utility bill.
- Medical expenses.
- Dental treatment.
- tax.
Some utility companies will offer extended payment terms or allow you to spread payments out over several months. Ask about “fixed payment” options for your electricity, water, and gas bills, which will help you predict payments and avoid higher bills during peak usage periods, such as winter and summer.
Medical and dental offices often offer the option to spread payments over several months. If you are behind on your federal, state, or property taxes, contact your local tax office to discuss payment options.
Who is a repayment plan suitable for?
Repayment plans are great for people who are struggling to pay utility bills, medical bills, or taxes and are looking for an affordable monthly payment.
6. Borrow from friends and family
Financial hardships and obstacles affect many people, but your friends and family will be the ones who understand your struggles best. Yet asking loved ones to lend you money can be scary, as there’s always the possibility that it could cause a rift in your relationship if you can’t repay the money.
Have open communication with anyone lending you money, and set up a payment agreement so you’re accountable for making monthly payments.
When you’re struggling financially, it’s important to know you’re not alone. Even if family and friends can’t directly lend you the cash you need, they may be able to help in other ways.
If you need to temporarily take on a second job or hustle, ask for childcare help or even cook extra meals so you can save money until payday. This kind of help might be enough to get you through a cash-strapped period.
Who is this good for?
Loans from friends and family are a better option for those with a support network who are willing and able to lend funds with little to no interest and are confident in their ability to repay on time.
7. Borrow from your retirement accounts
If you have money in a retirement account such as a 401(k) through your employer, you can borrow against some of that money. With a 401(k) loan, you don’t have to base the loan on your credit score, and the interest rates are usually very low.
In most cases, loans must be paid back within five years, and payments are deducted from each paycheck until they’re paid in full. If you leave your job before paying off the balance, you could pay taxes and penalties. And you can’t borrow more than $50,000 or 50% of your settled account balance.
Who is a 401(k) loan right for?
401(k) loans are better suited for people who have exhausted traditional funding options and want access to short-term loans without high interest rates.
8. Consider refinancing your mortgage
A cash-out refinance is when you borrow more than you currently owe and receive the difference in cash. Mortgage interest rates tend to be much lower than other types of bad credit loans. If you have at least 20 percent of your home in equity, you may be able to qualify for an FHA cash-out refinance even if your credit score is around 500.
Because you’re borrowing more, closing costs will be higher and the approval process can take more than a month. Like a home equity loan or HELOC, this type of refinance uses your home as collateral, so you risk losing your home if you default.
Who is a Cash-Out Refinance Right for?
Cash-out refinancing is a great option if you have a significant amount of home equity and want to take advantage of a better interest rate while also withdrawing the difference in cash.
Conclusion
To avoid paying exorbitant interest rates and fees, it’s best to explore bad credit loan alternatives. If you don’t need the money urgently, take your time to weigh the pros and cons of each bad credit loan type and alternative.
Regardless of which option you choose, always take steps to improve your credit score during the process, as this can help you qualify for cheaper borrowing options later on, as well as better interest rates on good credit loans later on.
