Personal loans are a nifty way to finance almost anything you want because they are flexible loans. If you want to finance a new car, a wedding, or a vacation, personal loans can help you finance it. However, just because they are flexible, convenient, and easy to get doesn’t mean that they are always the best choice.
Also, they are not necessarily the cheapest option out there. This is even worse if you have bad credit because the interest rate will be much higher. If you’re looking for a good alternative to personal loans, you can find some viable options on the internet. From credit card cash services to home equity loans, these alternatives will help you finance your needs as long as you meet their requirements.
Take note, however, that these options are situational, which means that they should only be used in specific situations. Here are some alternative options you might want to know if you want to avoid personal loans.
Credit Cards
Is your mind screaming, “I need money now,” but you’re tired of going to the bank to take out a loan because of the long process? No need to look further beyond credit cards! Whenever and wherever you need to make a purchase or pay a bill, credit cards are convenient when you don’t want to opt for personal loans.
This is especially true since most credit cards offer a rewards system right now that lets you earn points every time you make a purchase or pay a bill using the credit card. So how does it work? If you get approved for a credit card, your credit card issuer will then give you a physical card that you can use to make transactions.
Then, every time you make a purchase, you can give the store your credit card information by swiping your card on their credit card machine. It will then automatically deduct money from your credit card balance that you will have to pay later at the end of the month.
Your credit card issuer will also give you a credit card limit when you open a credit card. This limit is the total amount of money you can use for your bills and purchases. Of course, as mentioned earlier, you have to pay for all of your purchases typically at the end of the month, along with interest.
Thankfully, most credit cards have a grace period where you can pay for your balance without interest. So how are credit cards better than personal loans? If you pay your balance within the grace period, you will not accrue interest, unlike personal loans.
401k Loans
401k loans, as the name suggests, are loans that you can borrow against your 401k plan. The interest rate for 401k loans is typically a point or two higher than the prime rate, but it can vary depending on your plan. Take note that you can only borrow up to $50k or 50% of your total 401k contributions.
Of course, just like any other type of debt in the market, there are pros and cons regarding 401k loans. Some of the pros are that they are usually easy to get approved for, especially when you have your employer’s blessing and you get a receipt of the interest paid. For example, you took out a loan from your 401k, and you are paying 12% interest. That 12% interest will go back to where the money came from, essentially to your 401k.
One major disadvantage of 401k loans is that you will lose the tax-sheltered status in the event of a job loss. However, you also get a grace period wherein you can pay for the loan in full. But if you fail to do so, not only will the amount be taxable, but you will also get an additional 10% penalty from the IRS if you are under the age of 59 ½.
How is it a viable alternative to a personal loan? 401k loans usually don’t require a credit check, which won’t affect your credit that much. All that is required to get a 401k loan is a vested account balance in your 401k plan.
Home Equity Loans
This one is viable alternative to personal loans. It is easy to get as it doesn’t require a strict credit check. All you need to have is equity built up in your house. You risk losing your house if you fail to pay back the loan. How does it work?
The amount of money that you can borrow from your equity depends on the value of your home and the remaining balance that you have in your mortgage. Also, when it comes to interest rates, you’re usually offered either a fixed interest rate or a variable interest rate. The fixed interest rate is self-explanatory, but on the other hand, a variable interest rate depends highly on the market.
Final Words
Personal loans might be convenient as they are easy to get and have reasonable interest rates and repayment terms, but they are not necessarily the cheapest type of loan. If you’re looking for some viable alternatives, we hope that the options we laid out for you above can be useful to you.