What Are the Cheapest Alternatives to a Personal Loan?

Personal loans can be useful. They have a fixed monthly payment and a set repayment term, so you know how much you’ll need to pay each month and when the loan will be paid off.

But a personal loan is not always the least expensive way to borrow.

Depending on your credit history, financial situation and assets, you could qualify for other types of loans with a lower interest rate or APR.

Here are some common alternatives to a personal loan and when each one might make sense for you.

A home equity line of credit may reduce borrowing costs compared to a personal loan

For homeowners, a home equity line of credit, or HELOC, may offer a lower interest rate than the APR on a personal loan.

However, HELOCs typically offer variable interest rates, while personal loans generally have fixed rates. As a result, your monthly HELOC payment can increase if interest rates rise. Some lenders offer fixed-rate HELOC options that let borrowers to lock in a fixed rate and repayment term on all or part of their outstanding balance, providing payment predictability similar to a personal loan.

A home equity line of credit is secured by home equity. Because the lender has collateral, HELOCs can offer lower variable rates than a personal loan’s APR. Lenders may also be more willing to provide larger credit lines.

Unlike a personal loan, a HELOC is a revolving line of credit. Homeowners can borrow, repay and borrow again up to the approved credit limit during the draw period.

HELOCs are popular choices for home improvement projects, major expenses and consolidating higher-interest debt.

A balance transfer credit card can be a lower-cost alternative to a personal loan

A balance transfer card can help you consolidate and pay off existing credit card debt. In some cases, a balance transfer credit card can be a lower-cost alternative to a personal loan.

Some balance transfer cards offer a promotional 0% APR for qualifying applicants. This introductory rate can temporarily reduce interest costs as you pay down your credit card debt.

However, these low promotional APRs are typically temporary. In contrast, personal loans offer a fixed interest rate over the entire life of the loan.

If you don’t pay off your balance before the promotional period ends, many cards charge interest on any remaining balance at the card’s standard APR, which can be significantly higher than the introductory rate. Some credit cards may also charge a penalty APR if you miss a payment.

Before you apply or transfer any balances, it’s best to understand the credit card’s terms, promotional period, and ongoing or penalty APR. Many balance transfer credit cards charge a balance transfer fee.

Secured loans may be cheaper than a personal loan

Some borrowers could qualify for loans based on the assets they already own. There are loans backed by stocks, savings and even assets, such as art, bitcoin, boats and recreational vehicles.

Lenders typically offer lower APRs for secured loans because there is collateral that they can take and sell to cover any unpaid balance or expenses if a borrower stops making payments. The collateral makes the loan less risky for the lender. Borrowers are also usually more motivated to pay back the loan so that they don’t lose their pledged asset.

What you should consider when looking for an alternative to a personal loan

Borrowers should look beyond the interest rate when comparing loans. The lowest rate doesn’t always mean it’s the most affordable option.

When comparing borrowing options, look at the APR, which includes the interest rate and mandatory fees, such as origination or other fees.

It’s also important to understand repayment terms. A loan with a lower monthly payment might cost more if it’s extending repayment over a longer period.

When is a personal loan the best option?

Personal loans give you a lump sum that you repay over a fixed period. The fixed monthly payments and set repayment term don’t change, which can be helpful for budgeting.

Personal loans may also have lower APRs than some credit cards, which can help reduce your borrowing costs if you need to carry a balance. You can carry a balance on a credit card almost indefinitely, which isn’t possible with a personal loan.

Lenders typically base your APR on how much you borrow, as well as your credit history and overall financial profile.

The bottom line

A personal loan is only one way to borrow money. Depending on your situation, a home equity line of credit, balance transfer credit card or a secured loan can reduce your borrowing costs. Try to compare the total cost of borrowing money and not just the interest rate to understand what the best option might be for you.

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This post is for informational purposes only and does not provide any financial, investment or tax advice. The information presented may not be suitable for your individual circumstances. Before making any financial decisions, consider consulting a qualified professional who can provide advice based on your specific situation.