A personal loan is just one way of financing something you want to purchase. In reality, there are many ways for you to finance something, not just personal loans. From line-of-credits to home equity, if you want some financing options, there’s a lot to choose from.
Although online personal loans can be used for many purposes, they are not necessarily the cheapest option out there. That said, that only depends on the circumstances that you’re currently in. So, if you’re looking for alternatives to personal loans, here are some of them.
Line of Credit
A line of credit is a flexible kind of loan that you can get from a financial institution. It works similarly to a credit card, albeit with some caveats. Just like how a credit card gives you a limited amount of funds, a line of credit is a defined amount of money that you can access whenever you need it and then repay it immediately over agreed conditions.
Like a loan, once you borrow money, interest will accrue, but before that, you must need approval from the financial institution for the amount of money you want to borrow. Note that the interest rate varies from lender to lender, and it also considers factors like your credit score, credit reports, etc.
By and large, lines of credit aren’t typically used for one-time big purchases like what you would do with a regular loan.
That said, you can’t use it to buy a house or a car. Lines of credits are usually used for things that banks don’t normally underwrite a loan for. So the basic use is for vagaries in monthly income or expenses for long-time projects.
Let’s say you’re a self-employed person whose monthly income is irregular or someone whose pay is often delayed and unpredictable. While a credit card is suitable for tough times like this, a cheaper alternative is a line of credit. In short, a line of credit is most useful in situations when there will be cash outlays.
Peer-to-Peer lending, or P2P, enables an individual to get a loan from another individual. It’s also known as social lending or crowdlending and started its existence back in 2005. Usually, you can find this transaction on the internet, where there are a lot of websites that facilitate P2P. Of course, each website has its terms and regulations for its transaction.
Also, most sites have a wide range of interest rates that are still based on some factors in the applicant. So, how does it work? First, an investor will open up an account within the site and deposit money to be dispersed in the form of a loan. The applicant will then post a loan profile assigned a risk category that determines the loan applicant’s interest rate.
The loan applicant will then review the offer, and if it suits them, they will accept it. The money transfer and the payment will be made through the platform, and it’s entirely automated. Or, if both parties accept, they can haggle for the offer.
But of course, it’s not without setbacks. Investors looking to join a P2P lending site still need to worry about default rates like they do with a conventional bank. And of, as usual, these default rates constantly fluctuate.
Also, you need to check the fees on every transaction. Every site makes money differently, but there will always be a commission fee charged to the lender, the applicant, or both. And not only that, but these sites can also charge origination fees, late fees, and bounced-payment fees.
Home Equity Loan
Another alternative to personal loans is a home equity loan. Also known as a home equity installment loan or simply “second mortgage,” a home equity loan is a type of consumer debt.
This type of loan allows the borrower to borrow against the equity they have in their homes.
The loan amount varies according to the house’s current market value and the homeowner’s mortgage balance. They tend to be fixed-rate, which sets them apart from a HELOC. Essentially, a home equity loan is akin to a mortgage, so people call them a second mortgage.
Traditional home equity loans have a set repayment term, and the borrower will still pay regular fixed payments every month.
Just like mortgages, if the loan is not paid off, the house will be sold instead to satisfy the remaining balance. That said, you should make sure that you’re able to pay this loan because if you can’t, there’s a good chance that you’ll lose your house.
There are many more alternatives to personal loans, but the ones listed above are the most common. They come with their pros and cons, so you should think first before getting one of them. However, they are tailored to a specific niche, so if you think that one of them satisfies your circumstances, then you should consider getting one of them.