7 Alternatives if You Can’t Qualify for a Personal Loan

Quick Answer

Consider these alternatives if you need to borrow but don’t qualify for a personal loan:

  1. Credit card
  2. Home equity loan or HELOC
  3. Personal line of credit
  4. Peer-to-peer loan
  5. Life insurance policy loan
  6. Retirement plan loan
  7. Mortgage refinance
Confused frustrated young man holding mail letter reading bad news that he was denied a personal loan

Personal loans offer quick, unsecured financing to cover an unexpected large expense, home renovation project or nearly any other purpose. Without collateral, many lenders require you to meet specific eligibility requirements, such as a good credit score and low debt.

But what are your options if you don't meet the criteria to qualify for a personal loan? Here are seven alternatives to personal loans to consider to access the funds you need.

1. Credit Card

Credit cards provide a line of credit, making it easy to borrow money when you're in a pinch. Like personal loans, you can also use your credit cards to pay for a surprise expense like repairing your car or replacing a broken refrigerator.

However, your plastic can also be expensive if you don't pay off your balances quickly. According to Federal Reserve data from November 2022, the average credit card interest rate is 20.40%, and some credit cards come with interest rates as high as 35.99%.

You may lower your borrowing costs if you qualify for an introductory 0% APR credit card, which provides an interest-free period of up to 21 months to repay your debt.

Pros of a Credit Card

Cons of a Credit Card

  • Often come with high interest rates
  • Qualifying can be challenging
  • Can take years to pay off if you only make the minimum payment

2. Home Equity Loan or HELOC

Another personal loan alternative is to tap into any home equity you have for cash. With sufficient equity, you may be eligible to borrow money through a home equity loan or a home equity line of credit (HELOC). With either loan, you must use your home as collateral to borrow money against your equity.

A HELOC provides an open line of credit so you can borrow as little or as much as you need, and only when you need it. You'll repay it over a fixed number of years, but repayment could include a substantial balloon payment near the end of the term. By contrast, a home equity loan allows you to access a lump sum of money that you pay back in fixed installments.

Pros of a Home Equity Loan or HELOC

  • Potential to access up to 85% of the equity in your home
  • Lower interest rates than other credit products
  • Eligibility requirements may be less stringent than unsecured loans

Cons of a Home Equity Loan or HELOC

  • Home serves as collateral; you could lose it if you miss payments or default
  • Shrinks the equity in your home
  • Could include origination, appraisal, title and other fees and closing costs

3. Personal Line of Credit

A personal line of credit (LOC) is a strong alternative to a personal loan because it allows you to borrow money as often as you need up to your borrowing limit. While not all banks offer personal lines of credit, if you anticipate borrowing money more than once and your bank offers the option, a LOC may be more appropriate than a personal loan.

For example, if you're renovating your home, a personal line of credit can come in handy if you go over budget or add upgrades that aren't in your original plans. If your income is irregular, you might use a personal line of credit to bridge the gaps between paydays.

Pros of a Personal Line of Credit

  • Borrow only what you need rather than a predetermined amount
  • Pay interest only on the amount you borrow, not on your approved limit
  • Use funds for nearly any legal purpose

Cons of a Personal Line of Credit

  • Often requires good or excellent credit for lower interest rates
  • Some lenders charge an annual fee
  • Convenience of an open-ended credit line could tempt you to spend more than necessary

4. Peer-to-Peer Loan

Peer-to-peer (P2P) loans present one of the better personal loan alternatives for borrowers with fair or poor credit. P2P loans are funded by individual investors who may be more willing to work with borrowers with less-than-ideal credit reports and credit scores. You also may receive a lower interest rate than you'd find with a traditional lender.

To obtain a peer-to-peer loan, you'll need to submit an application on an online peer-to-peer platform. If approved, the platform will pair you with potential investors who'll ultimately decide whether to fund your loan.

Pros of a Peer-to-Peer Loan

  • Potentially lower interest rates than traditional loans
  • May qualify with below-average credit
  • Loan amounts generally max out at $50,000, similar to personal loans

Cons of a Peer-to-Peer Loan

  • May have stricter credit and income requirements than traditional lenders
  • May incur origination fees ranging from 1% to 8% of the loan amount
  • Could pay higher interest rates than traditional loans, especially with poor credit

5. Life Insurance Policy Loan

If you have a permanent life insurance policy, you may be able to withdraw some of the cash it's accumulated instead of using a personal loan. In this scenario, you could access some of your earnings, just as a homeowner can tap into their home's equity for cash. With a life insurance loan, your policy serves as the collateral, just as your home serves as collateral with a home equity loan or HELOC.

The repayment terms are usually flexible when you borrow from your life insurance policy. Your insurer may not even require payments on the loan, but your outstanding loan balance would be deducted from your death benefit amount.

Pros of a Life Insurance Loan

  • No credit check required
  • Interest rates are typically lower than traditional loans and credit cards
  • May qualify for a large loan amount, depending on the cash value amount in your policy

Cons of a Life Insurance Loan

  • Could decrease the death benefit amount your beneficiaries receive if you don't repay the loan in full
  • Must pay interest on the borrowed amount
  • Could incur taxes if interest compounds and your debt balance exceeds the policy's cash value

6. Retirement Plan Loan

Most employer-sponsored retirement plans, such as a 401(k), allow you to borrow from your account and repay the loan with interest. The obvious advantage here is that any interest you pay ends up in your retirement account rather than paying it to your lender as you would with a personal loan. And since retirement loans usually don't have a minimum credit requirement, it may be a good option if your credit is preventing you from getting a personal loan.

Be aware, however, that you'll lose out on any earnings you would have had if you hadn't taken out the loan. You also typically have to repay the loan within five years, and you'll pay taxes if you fail to repay your loan on time.

Pros of a Retirement Plan Loan

  • More flexible borrowing requirements than personal loans
  • Pay yourself back with interest as opposed to paying interest to a financial institution
  • The most you can borrow is the lesser of $50,000 or half your total vested balance

Cons of a Retirement Plan Loan

  • Reduces your retirement account, which could diminish your earnings and leave you with less money when you retire
  • Retirement contributions may be placed on hold while you repay the loan
  • Could pay taxes on the outstanding loan balance if you default

7. Mortgage Refinance

Like a personal loan, a cash-out refinance provides access to funds to consolidate your debt, cover an emergency expense or use for countless other purposes. When you refinance your home, you replace your existing mortgage with a new, larger one. In a low interest rate environment, your new mortgage will ideally come with a lower interest rate and monthly payment.

Generally, lenders allow you to borrow up to 80% of your home's value. So if you owe $300,000 on a home worth $500,000, you may qualify for a refinance loan of up to $400,000. You then receive the difference between the new loan amount and the original mortgage balance, or $100,000 in this scenario, in cash to use as you'd like.

Pros of a Mortgage Refinance

  • Low interest rates compared to credit cards and unsecured loans
  • Potential to borrow large a amount, depending on your equity
  • Tax deductions available on the loan's interest if you use the funds to make home improvements

Cons of a Mortgage Refinance

  • Higher payments could make it harder to manage your finances
  • Uses your home as collateral so your lender can foreclose on your home if you can't make your payments on the new loan
  • May have to pay private mortgage insurance (PMI) if your new mortgage exceeds 80% of the home's value

Improve Your Options With a Good Credit Score

With many personal loan alternatives, you must have good credit to qualify or receive lower interest rates. Start by checking your credit report and credit score for free with Experian. Review your credit report for any inaccurate data, errors or fraudulent information. If your credit could be better, you can expand your options and receive more favorable terms by taking steps to improve your credit.