What would you do if you needed a little help covering an unexpected bill?
Some people would take a trip to their local bank branch and ask for help. If they have a prime credit score and positive financial history with their bank, they’ll likely get a loan without delay. A fair or good credit score opens plenty of financial doors, making it easy to secure a personal emergency loan in an emergency.
Now let’s imagine you’re dealing with a sudden expense you can’t afford, but this time, you have sub-prime credit. Although records show the nation’s average credit score is the highest it's ever been, some people slip through the cracks. Mainstream banks often shut their doors to people with bad credit, making it trickier to find cash in an emergency.
Or at least, it may seem that way at first.
While it’s true, a prime credit score will help you find a low-interest loan with relative ease, it’s not the only prerequisite to getting the cash you need. Being locked out of the traditional banking system doesn’t mean you’re stuck without a back-up plan. Today, we’ll explore six lending alternatives that don’t necessarily prioritize a borrowers’ credit score.
1. Family and friends
Having the bank reject your loan application can be devastating, but it’s not unique. Mainstream banks turn down plenty of people every day. In most cases, their reasoning is simple: without a prime credit score or flawless account record, these borrowers don’t meet the bank’s requirements. People with low incomes or those who meet the Federal Deposit Insurance Corporation’s criteria for being unbanked or underbanked may also have their application rejected.
When the biggest banks refuse the underserved, these people often turn to family and friends for help. A 2017 Finder survey shows that on average, Americans borrow $184 billion every year from the people they know and love the most.
College students relying on the Bank of Mom and Dad are no stranger to this kind of loan alternative, but few can actually use their parents as outright alternatives to student loans. As the cost of tuition increases, the College Board reported in 2018 that most parents contribute only 34 percent of the average cost of higher education out of pocket. Students cover the rest with a mixture of savings, scholarships, and parent and student loans. Some also search out alternatives to parent plus loans (like private personal loans) to help pay tuition.
It doesn’t matter if you’re a freshman arriving on campus for the first time or an independent adult who needs help in an emergency; borrowing cash from the people you love isn’t always easy, but it may be the best ways to cover an expensive item, bill, or repair you can’t afford on your own.
A loan from a friend or family member comes with plenty of advantages. While a traditional lender often has strict expectations of their borrowers, the average person probably doesn’t have these conditions set in place. Unlike other lending alternatives on this list, it’s not like you’ll have to submit an official application to show your credit score before they give you any money.
Depending on your relationship, they may also be more flexible should extenuating circumstances make it hard for you to repay by the day you agreed upon. They may not even charge you interest on what you borrow, which means you won’t end up owing more if you take longer to repay.
While a loan from your family or a friend may not come with traditional terms, it may come with a social fee. Without the typical terms and conditions that come with an official loan agreement, a personal loan from a loved one may not have the structure it needs to be mutually beneficial to both borrower and lender. Tensions can run high if you delay or miss a payment — likewise if your lender decides they want their money back faster than they first agreed.
Even if all goes well and you repay the money on time, it has the potential to put a strain on your relationship. Money can be a point of contention and few people like parting with their hard-earned cash! Your friend may resent becoming a human ATM.
That’s not to say all of these loans are doomed from the start. You can borrow money from friends and family without any issues if you’re careful about how you ask for help.
The first step to protecting your relationship is recognizing this loan is still a business arrangement even though the money is coming from a loved one. You should put your agreement down in writing to make sure expectations are transparent for both sides. It doesn’t have to be anything as official as a signed and notarized legal document, but a written contract will help legitimize your loan.
2. Payday loan
Not everyone has the support of friends or family members willing or able to help. Luckily, there are other ways to get the cash you need — even in an emergency. When you need urgent help taking on necessary repairs or paying unexpected bills, payday loans may be the fast-acting answer you need.
Payday loans are short term loans that are often more convenient to secure than traditional personal loans issued by a bank. They involve less red tape, as most online lenders streamline their application and approval process to create a simple and straightforward experience.
Payday loan lenders typically raise the APR to account for the risk involved in offering loans to consumers without solid credit scores. To underwrite the loan, the lenders use proof of income and other criteria to assess the borrower’s ability to repay the loan.
With fewer formalities slowing down these online lenders, they often connect you with cash without any unnecessary delays. In some cases, online lenders can deposit the cash you need within the next business day following your approval.
There’s a reason why it’s called a “payday” loan; its repayment process is tied to your payment due date. You must pay off your principal (how much you owe), plus fees and interest, in one-lump sum on the same day you receive your next paycheck. Before you borrow, you should know how payday loans work with your pay schedule to make sure it’s the right fit for you.
In most cases, this means you’ll end up repaying your loan within two to four weeks from the date the loan was issued. However, it depends on your pay schedule and the specific date set out in your loan agreement.
With more than 23,000 payday lenders in the country, these brick-and-mortar lenders now outnumber McDonald’s restaurants, and they’re joined by an increasing number of payday loan lenders providing cash loans online.
Every year, 12,000 Americans use payday loans — making payday loans one of the most popular personal loan alternatives. Between 2013 and 2017, the number of people who opened a loan with an online lender grew by at least 50 percent in most states.
3. Installment loans
For some people, a payday loan is a perfect solution to their minor cash flow problem. For others, its short term makes it a challenging loan to repay on time.
For those looking for longer alternatives to payday loans, installment loans may be the answer. As another online loan, they’re often faster and easier to secure than traditional loans. Most online lenders have simplified their lending processes to cut down on the time it takes for borrowers to apply and receive the cash they need.
Like payday cash advances, most online installment loans don’t require collateral and have higher interest rates than traditional personal loans. In exchange for higher APRs, installment loan lenders usually don’t put as much of an emphasis on borrowers’ credit scores. As a result, people with sub-prime credit may be approved.
Unlike payday loans, installment loans usually have longer repayment terms. While a payday loan must be repaid in one lump sum, you typically repay an installment loan over a series of payments that coincide with your pay dates. This payment plan may last several weeks or months.
They also tend to allow a larger lending limit. How much you can borrow hinges on your state lending laws as well as your monthly income. Several more factors may affect your borrowing experience, so there may be a greater difference between these loan alternatives depending on where you live.
To find out what they may be, check out our post about when to get a payday loan vs an installment loan — we’ve made sure to go over the terms in greater detail to help you determine if either option works with your finances.
4. Peer-to-peer loans
Moving from one corner of the Internet to the other, we leave behind online installment loans for peer-to-peer loans (or P2P loans). In a broad sense, these loans can happen between any “peer” or person you know, including friends and family. As long as the money doesn’t come from a bank or finance company, any loan from an individual (or a group of people) qualifies as a peer-to-peer loan.
That said, when most people say they’re applying for a P2P loan, they don’t mean they’re asking their cousin for a little extra help with the bills. P2P loans tend to refer to online loans facilitated by websites and apps that connect borrowers with investors from all over the world — and vice versa.
Think of it as a community fundraiser where a lender (or multiple lenders) invests in your loan. The P2P platform draws up the terms and conditions while exchanging the funds between lender and borrower.
A P2P platform makes it easy to find a cash advance with fewer costs that come with the typical traditional bank loan. However, many peer-to-peer loans come with more complexities, which can result in longer processing times before you receive the cash you need. Depending on the P2P service you choose, they may also require a good credit score and proof of a high income.
Although they’re mainly a lending alternative for personal loans, P2P facilitates alternative small business loans, too. It all depends on the website or app you choose. As with payday loans and installment loans, the rates, terms, and conditions differ from company to company.
5. Personal lines of credit
With a personal loan, you’re approved for a set amount of money. Typically, interest starts to accrue on your principal as soon as you receive your loan, and once you spend the money, that’s it. The only way you can get more is to take out another loan. In most cases, lenders will require you to pay off the first one before you can successfully apply for another one.
A personal line of credit works a little differently. Generally, you only have to apply once to receive your credit limit. You can use as much or as little of your credit as you want. You’ll only be charged interest and fees on the amount used.
Once you start using your credit, you’ll receive a statement showing how much you owe just like you would a credit card. This bill calculates your interest and fees, as well as your minimum payment to keep the line of credit in good standing.
Here at MoneyKey, we encourage borrowers to pay off their line of credit in full at each pay cycle. Barring that, we suggest you pay as much as you can each billing cycle, as this will help reduce how much you pay in interest charges.
It will also free up your available credit. As an open-ended loan, a personal line of credit lets you withdraw money up to your limit any time it’s available. That means once you pay off your credit and reduce your balance to zero, you may withdraw cash up to your available limit without applying again.
Which one is right for you?
In certain cases, the type of loan you need is abundantly clear — like when you need help financing a startup. The alternative small business loans available through a P2P app would work better than a personal payday loan that’s due by your next paycheck.
However, there may come a time when the “correct” loan for your situation isn’t as obvious. In which case, you should:
- Read the T&Cs. Otherwise known as the Terms and Conditions, these make up a very important part of your loan agreement. They outline what’s expected of you as a borrower. They will also clarify what you owe and when you must repay everything to avoid penalties (if there are any). Knowing when you owe money will help you determine if a cash advance may be a good option for your needs and abilities. As you crunch the numbers, keep a careful eye on the interest rate. This will impact how much money you owe in the end.
- Compare loans. Even once you decide an online installment loan is more practical than a line of credit, you’ll still need to narrow down your choices. Although it may be tempting to pick the first one you find, this may backfire. Sure, you’ll likely get the cash you need faster when you don’t waste any time applying, but you may pass over another installment loan with better terms in your haste to sign an agreement. By taking the time to compare and research your options, you’ll improve your chances of finding something that fits.
- Borrow within your limits. A solid rule of borrowing is to ask for what you need, taking no more than that. While you may pre-qualify for a larger loan than you need, don’t let the dollar sign persuade you. Remember, you have to pay back every dollar you borrow, plus interest and fees. By limiting how much you take out initially, you’ll potentially pay less in interest.
Break the mold: try non-traditional loans in an emergency
These responsible borrowing techniques may help you uncover a form of credit that works with your finances — even if you can’t borrow from a mainstream bank.
Although the traditional bank system provides the most common way to borrow, personal loans aren’t the only option for the underserved. Between family, online loans, and P2P apps, there are opportunities for people with a low credit score.
If you want to find out more about installment loans, payday loans, or lines of credit, click on the drop-down menu at the bottom of this page. See if we include your state in the list of available products to learn about your borrowing options today. They may end up being your back-up plan when an emergency strikes.