A personal loan is an excellent option for many people. It can cater to your financial needs with ease. However, the process of acquiring money through personal loans is sometimes lengthy.
Besides, in the presence of several comparatively more attractive financial instruments, a personal loan is not the first option for many.
You, as a consumer, should not make wise decisions because of a lack of banking knowledge and resources. So instead of applying for a personal loan right away, perform some research to find other more suitable options for you.
When To Not Take A Personal Loan?
People take out personal loans for every big and small need. However, what most people fail to realize is that personal loans have higher interest rates. If you are applying for a personal loan for the following reasons, it’s time to reconsider.
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Indulging in Luxuries and Vacations
While indulging in jewelry and vacations is a significant expense, it can leave you in massive debt. You can use credit card reward programs to save money on airfare and stay.
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Funding a Big Event
Having a fairy tale wedding is a dream for many. But these one-time celebrations can leave you in crippling debt if you decide to fund them with a personal loan.
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Buying a Car
Car loans offer low-interest options; it’s foolish to use a personal loan to buy a car.
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Financing Your New Business
Funding your business is the riskiest investment you will ever make. It’s better to find a business loan than lose your credibility by taking out a personal loan.
3 Better Alternatives for Personal Loans
Many people settle for personal loans without any consideration of any other solution loans. Let’s dive into some of the alternatives that you should consider before settling for personal loans.
1. Credit Card
Credit cards offer you the advantage of making purchases, earning rewards and paying the money back slowly or in a lump sum. If you want to avoid interest charges, you can repay the spent money within a month.
Personal loans get you a lump sum amount in one shot, no doubt. Credit cards, on the contrary, offer low-interest rates and amazing rewards.
Credit cards are a revolving line of credit; this means that you can borrow to your total credit limit after you repaid the money.
Besides, in allowing you to make purchases and pay back what you owe little by little over time or all at once, they make for a great alternative for personal loans.
You can pay back as much as you want, only if you pay the minimum every month. If you repay your balance in full within a month, you’ll avoid interest charges. The ease of getting a credit card in comparison to the painfully slow process of personal loans is an added plus point!
Pros
- Earn rewards through credit cards
- Extended warranty of selected purchases made with a credit card
- You can avail 0% interest rate for a fixed period
Cons
- Some credit cards may have high-interest rates
- You can be in massive debt if you don’t control your spending habits
2. Personal Line of Credit
If you don’t want to be restricted by the low credit limit of credit cards, a personal line of credit might be the right option.
A personal line of credit is very similar to credit cards, but there is no set schedule to repay the money. You can borrow as much as you need whenever you want as opposed to a personal loan.
One advantage of choosing a personal line of credit over credit cards is that you can avail yourself of lower interest rates. With easy access to funds, you don’t have to decide how much money you want to borrow, which is the case in personal loans.
Pros
- Great for people who don’t have a steady income
- With a personal line of credit, there is no need to apply for a loan every time you need money
- More flexible than personal loans and can access money anytime
Cons
- Some lending authorities can charge a fee to keep the line of credit active for borrowing
- To qualify for a personal line of credit, one needs to have an extensive credit history
- Many people tend to overspend when they have access to an open line of credit
3. Peer-to-Peer Loan
Unlike personal loans, which financial institutions sponsor, peer-to-peer loans are backed by single investors. They are extremely similar to personal loans, except the lender can be a single investor or multiple lenders.
To qualify for a peer-to-peer loan, you need to have an above-average to excellent credit history. Your application has to be very detailed. It is because investors are only interested in reliable borrowers.
On the other hand, many individual investors can even overlook your bad credit score and consider other factors when lending you money. Since you are not borrowing from a financial institution, the process is subjective to the investor’s requirements.
If you’re looking for quick cash, the peer-to-peer loan might be the easiest thing.
With a detailed application and shortlist process, personal loans require multiple rounds of verification. On the contrary, peer-to-peer loans can get approved quickly.
Pros
- Peer-to-peer loans are great for acquiring cash as fast as a single business day
- Investors can consider applicants with a low credit score for loans
- Peer-to-peer loans are flexible when it comes to defaulting a payment
Cons
- You will have to pay 1% – 8% of the loan amount as an origination fee
- Some peer-to-peer loans can take more time to process than personal loans
Summing Up
It’s better to weigh in all your options instead of blindly putting up collateral for personal loans. Check out these cheaper alternatives and see if they make a better fit for your financial situation!
