Alternative Loans: 8 Options Beyond Traditional Bank Loans

Traditional loans aren't the best option for everyone. If you need to make money moves to access cash fast, unconventional lending options are worth looking into.

Here are some options that can bail you out of a tight spot. However, as with nearly everything, there are pros and cons to each. So, it's important to do your research before making a decision.

Peer-to-peer lending

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Peer-to-peer lending is different from taking out a loan from the bank. With this type of lending, a third party will connect you to potential investors.

These investors often charge lower interest rates than a bank would. However, borrowers might need to answer more questions than they would if they were applying for a traditional loan.

Home equity line of credit

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A home equity line of credit (HELOC) allows you to tap the home equity you have built up as a homeowner. Unlike with a home equity loan, you borrow only what you need. You can continue borrowing throughout your draw period, which is typically five to 10 years.

However, taking out a HELOC is not without risks. Defaulting on a home equity line of credit can damage your credit score. Even worse, it can potentially cause you to lose your home if you fail to make the payments.

Additionally, your payments can vary from month to month, which can make it difficult to budget for them.

Cash advance on a credit card

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If you find yourself in an emergency where you need cash fast, taking out a cash advance on your credit card is one solution. However, it might not be the best option.

Cash advances can come with high fees. You will also owe interest on that money just as you would if you swiped your card to make a purchase, and the interest rate might be higher than the rate you would pay on something you purchased.

There are also limits to how much cash you can request. The cash advance fee is included in that amount.

Unconventional personal loan

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Unconventional personal loans are typically easier to qualify for than traditional loans. They could be a good choice for borrowers with limited credit, employment and income histories.

Unconventional loans aren't provided by traditional banks, and lenders are often online-only companies, so this is a potential drawback for some people.

These nontraditional lenders will typically perform a "soft" credit pull to obtain loan terms and a "hard" pull only if borrowers choose to move forward. 

The "soft" credit pull won't impact your credit score, so you can continue searching for a lender safe in the knowledge that your score won't suffer if you don't like the terms and decide to back out.

Loan against a 401(k)

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If you have a 401(k), you might have the option to take out a loan without going through a bank. Unlike with early withdrawals, you won't need to pay taxes or penalties with a 401(k) loan. 

And while you will pay interest, those payments will go back into your retirement account.

However, your retirement plan might have limits on these loans. Reducing your 401(k) balance — even temporarily — can slow investment growth. 

And if you lose or leave your job, you might be required to pay back all of the loan promptly. If you don't, you could be subject to taxes and penalties.

Loan against a life insurance policy

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If you have permanent life insurance — such as a whole life or universal life policy — you might be eligible to take out a loan against the policy's cash value.

Borrowing against your life insurance policy helps you avoid a credit check and often comes with favorable repayment terms. 

However, it can take time for your policy to build a significant cash value, and failing to repay the loan could result in an insurance lapse or decreased benefit.

It's also important to consider how comfortable you are with your beneficiaries receiving a lower death benefit amount should anything happen before the loan is repaid.

Crowdfunding

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Raising money is one option if you are trying to get cash to start a new business. Crowdfunding sites, such as Kickstarter and Indiegogo, allow new companies to raise money through donations or investments.

If you don't want to offer a portion of your company to investors, you can try offering early access to products or services in exchange for contributions.

Small business microloans

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Small business microloans are another option for kickstarting or growing a business. The Small Business Administration (SBA) has a program for microloans up to $50,000. You can find information for applying for these microloans at your local SBA office.

Small business microloans are provided by the government. If approved, your funding will come from local organizations.

Bottom line

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Utilizing unconventional loan options can help you eliminate some money stress now. However, taking out nontraditional loans can come with consequences that might impact your financial situation later.

It's important to fully understand the terms of the loan and consider your ability to repay it before committing. Borrowers should also consider whether any potential consequences are worth quick access to cash.

If you are unsure whether one of these options is right for you, speak with a financial advisor.

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