Alternatives to a Personal Loan

Personal loans can be an expensive form of credit, where you might end up paying thousands of dollars in interest and fees over the life of the loan. For some borrowers, the debt can become unmanageable, damage their credit and possibly even lead to bankruptcy. As such, you should generally only take out a personal loan after you've exhausted cheaper alternatives.

Use cash/savings

This is only an option if you're fortunate enough to have savings and/or an emergency fund that could cover the personal loan. Some people value the reasurrance of having savings in the event of some unexpected emergency (e.g. layoff, illness, etc.). Just know that you could be paying quite heavily for that peace of mind, especially if the APR on the loan is high.

As a compromise, you could choose to use some—but not all—of your savings and so reduce the size of the loan. There's no universally correct answer, only the outcome that best aligns with your financial circumstances and attitude toward debt.

Borrow from family or friends

If using your savings isn't an option, you could approach family or friends. Typically, these types of loans are much cheaper, though not always. Make sure you're not being scammed or exploited.

Not everyone is fortunate enough to have people in their network with spare cash available to lend. But if you're one of the lucky ones, treat the loan as you would one from a bank: agree on a repayment plan and put it in writing. Unpaid debts are a common cause of relationship breakdowns and can be a considerable source of stress for both parties. If you're unable to repay your loan, rather than a distant bank that loses money, it will be someone close to you.

Get a cosigner or co-borrower

While your family and friends may not be willing to lend you money directly, they may still be able to help you qualify for a personal loan and potentially save you money.

Someone could act as a cosigner on your application. This means they agree to become responsible for the debt if you're unable to make your payments. A similar concept is a co-borrower, who shares responsibility for the joint loan from the outset and is equally liable for repayment.

In both cases, because the lender faces less risk, you'll generally benefit from better approval odds and lower interest rates.

Pay with a credit card

If you have enough available credit on your credit card(s), this could be an alternative to a personal loan. The pros and cons of this approach will depend on your financial situation and access to credit.

Generally speaking, if the APR on a personal loan is lower than the APR on your credit cards, the loan will likely be the cheaper option. However, the decision can be more nuanced than that. Credit cards offer flexible repayment options and the minimum payment is often significantly lower than the fixed monthly payment on a personal loan. That flexibility may be useful if you're temporarily short on cash, though you could end up paying more interest in the long run.

Secured loan and/or provide collateral

Personal loans are typically unsecured, meaning the lender has no legal claim to your assets if you fail to repay the debt. Because lenders are more likely to lose money when a borrower defaults, unsecured loans generally come with higher interest rates.

If you have assets that can be used as collateral, such as a vehicle or home equity, you may be able to improve your approval chances and secure a better rate. Just remember that your collateral could be repossessed and sold to cover any outstanding debt if you fail to make your payments.

You should carefully consider the risks associated with secured borrowing and only take out a secured loan if, in your specific circumstances, the trade-off makes sense (e.g. choosing a secured loan instead of a payday loan).

Delay the loan until you're in a stronger position

Not every expense needs to be financed. Depending on why you're considering a personal loan, the most sensible alternative may be to postpone the purchase, find a cheaper option, or simply go without it.

If the expense isn't urgent, delaying your application could give you time to improve your financial situation and qualify for better terms. For example, you might focus on improving your credit score, paying down existing debts or increasing your income Even a modest improvement in your financial profile could make a meaningful difference to the interest rate you're offered.

A lower interest rate can save you hundreds or even thousands of dollars over the life of the loan. While delaying won't be an option for every borrower or every expense, it's worth considering whether borrowing today is truly necessary or whether waiting a few months could leave you in a much stronger position.