Personal Loan Alternatives to Consider

When thinking about a personal loan, some will wonder if this is the best option. We explore the alternatives and provide over a dozen options.

If you find yourself in a situation where you need to quickly come up with ways to pay for bills or other expenses due to something like job loss or similar, there are a few ways for Canadians to come up with fast cash to help cover expenses until you have things under control. But some options can be better than others, with most having their pros and cons. 

Personal Loans vs Installment Loans

The difference between personal loans and installment loans is small, with the main factors being the interest rates and length of time or terms available. 

Personal loans are usually reserved for individuals with a good credit score that might want the option of longer payments so they might be able to lower their monthly payments to work with their own budget and what they can afford.

Installment loans are more likely to be higher interest and from 6 to 18 months. This type of loan is more suited for someone that wouldn’t qualify for a personal loan due to poor or bad credit history from the past. 

The choice really comes down to what you might be eligible or qualify for between the two, with personal loans having benefits because of the rates and terms options probably being better.

RELATED: What to Know About Canadian Personal Loan Rates

Personal Loans vs Credit Card Advance

Using a credit card cash advance is one way to get fast cash, but it does come at a premium, with the interest rate often being higher than personal loans if you have a good credit score. A cash advance from a credit card does provide fast funds, but would also be a more expensive way to borrow than personal loans in many cases. 

If you don’t already have a credit card, then a credit card cash advance would not be an option. If you are eligible for credit cards, a balance transfer to consolidate debt is another option.

Personal Loans vs Home Equity Line of Credit (HELOC)

Since a home equity loan or line of credit would use your home as collateral, this type of loan is more likely to provide better interest rates than an unsecured personal loan. These both come with fixed rates, but there are a number of variables to consider. 

Personal loans might have shorter borrowing terms and higher interest, but they don’t require collateral. Also, they tend to be funded more quickly than a home equity loan or HELOC. 

While a personal loan might make sense for debt consolidation, many home equity type loans can offer tax incentives if you are doing renovations. 

If you are a new homeowner, a home equity loan or HELOC might not be an option if you do not have enough equity built up already. While percentages will often depend on the lender, a home equity loan or  line of credit can require 20% equity to be considered. Also note that if you were to refinance your home that there are some additional expenses to account for such as appraisal fees, legal fees and more. 

Since your home is an investment, it’s not recommended to use it for shifting debt around. The best reason to take any kind of home equity loan or HELOC would be for home repairs or renovations for your investment. A personal loan would be the preferred option in most other situations like debt consolidation, bills, or other expenses.

RELATED: The Difference Between Personal Loans vs Home Equity Loans

Personal Loans vs Line of Credit

A personal line of credit often comes with lower interest rates than a credit card, but they can come with additional costs like a fee for keeping the line of credit open. The interest rates for a line of credit are variable, often higher than personal loans, and don’t start unless you access a portion of the line of credit available. A line of credit is useful as quick access to funds as needed, but a personal loan is often a better option between the two.

RELATED: Personal Loans vs Line of Credit – Which is For You?

Personal Loans vs RRSPs

If you’ve been making RRSP contributions then you might have a tidy sum standing by. But this is not an ideal to use since it’s for retirement and shouldn’t be touched. Also, if you withdraw from your RRSP you might have to pay taxes. So long as your funds are not part of a locked in plan, this can be an option. It would be advised to speak with your bank or financial advisor before proceeding with this.

How to Choose Between a Personal Loan and Alternatives

When it comes to the decision between personal loans and alternatives, assuming your bank or credit union are not an option, choosing between your options has a lot to do with which direction you might be leaning towards. 

But when it comes to borrowing, some of the more important factors to consider can often be about a few criteria for determining what is the best choice.

Interest rates – what the actual cost of borrowing might be. Look at the annualized percentage rate ( APR) which is usually higher than the interest rate as this determines any additional costs of borrowing such as fees and the more accurate way of comparing loans.

Fees – many lenders will have additional costs that are not reflected if you only look at the interest rates alone. This can include origination and other loan fees that you can find in a loan agreement.

Term – while you can lower your monthly payments with longer scheduled monthly payments, this adds to the cost of the loan through interest for the outstanding balance or debt. The shorter the term, the less the cost, but it should also work within what you can afford each month.

While there can be a number of factors to compare, these are a few of the main ones. Other things to consider might include whether collateral is required and overall processing time to get the funds you need.

RELATED: How Poor Credit Can Prevent Personal Loan Approval

What are the Alternatives to Personal Loans?

If you are looking for quick cash then some of these can also be a possibility to explore. 

Usually the first option to consider would be whether you can borrow from friends or family as this might be one way that might cost the least, if they don’t charge interest. Or turning to an emergency fund if you have one. 

Savings

While you probably considered this option already, it’s worth mentioning. If you have saved up, is now the time to use it? In most cases, the answer is yes. If you have other investments they might also be considered. 

Salary Advance

Taking an advance from your employer against your future salary can be one way to get fast funds when needed, but also consider how it might affect your budget since you won’t be getting a full paycheque in future. This is usually available as installments deducted from your pay or direct payments. If this option is not available through your employer you could also look into paycheck advance apps. 

Assistance Programs

There are a variety of community and government programs to consider, along with some through credit unions and other organizations.

Payment Plans

If you are behind on bills there are some situations where you can speak with the lender about a forbearance or deferment program to get through difficult times. If this is a recurring pattern it is probably an option worth exploring, along with possibly speaking to a credit expert or advisor to help you with creating a budget and assist with organizing your finances.

Side Hustle

Depending on how quickly you need the funds, you might find there are a number of side hustles as viable options to earning fast cash. From overtime at work or small jobs to a variety of other possibilities to explore, the extra hours can help supplement your income and possibly provide the additional funds needed at the time.

Overdraft

This can depend on how much you need, using an overdraft protection plan can allow you to withdraw more than you have in your account while avoiding NSF (non-sufficient funds) fees. If you had a bill you forgot about and you want to avoid an NSF charge, sometimes a quick loan can help you save, or avoid having a late payment on your credit report.

Title Loans

These loans are an easy way to get fast cash, even when unemployed, as they use your vehicle as collateral. These are short-term loans where you might 25% to 50% of your car’s resale value, but you must own your vehicle. But almost 1 in 4 to 5 also lose their vehicle for failure to repay according to some studies. If you vehicle was worth $20,000, and you get a title loan for $5,000 but unable to make your payments and lost it, you’ve let it go for much much less that it’s worth. Read more

Pawn Shops

If you have objects of value that you don’t mind parting with, such as electronics, jewelry or similar items that would be accepted, this is another way to get fast funds. This can also be a fast way to get money and usually a better option that payday loans.

Payday Loans

While this is a high interest loan that should be used as a last resort when other options have been exhausted or you don’t qualify, it does provide fast funds when needed. Be sure to carefully read the agreement before signing to understand what the terms are, so you don’t have any surprises and completely aware of what your payment would be, which will likely be due on your next payday. 

Other possibilities that might be considered if they are options could include borrowing against any RRSPs, cashing in stocks/bonds, or anything of value that might help.