There are countless reasons for taking out a loan.
Whether you’re paying college tuition, buying a house, or planning a wedding — loans can help you finance your dreams.
If you fit the right criteria.
What about people who do not qualify for a standard loan? Or what about people who don’t need to take out a loan for thousands and thousands of dollars? And what are the alternatives to standard loans?
In this guide, we will go over the options that may work for you when traditional loans will not. Money talks, so let’s talk about the best loan alternatives for 2024.
Table of Contents
Why Should I Seek Out Alternative Loan Options Instead of Applying for a Traditional Loan?
Traditional loans have disagreeable drawbacks like:
Long application processes
Strict eligibility criteria
Little to no flexibility
High-interest rates
Harsh repayment deadlines
Traditionally, loans have strict guidelines for how much and who is allowed to borrow. If you have a poor credit score or a bad lending history, you may not be able to get a loan — and if you do, the interest rates may be exorbitant.
So where does that leave people who do not fit the perfect little box that loaners seek in loanees?
Loans are not your only opportunity to receive money in advance. Loan alternatives can help you access the funds you need to finance the things you need or want. Some loan alternatives don’t require an application process, a good credit score, or high interest rates, unlike conventional loans.
So whether you need access to quick cash for emergencies or just really need to treat yourself while building credit, loan alternatives may be your more accessible option than a standard loan.
We all know the phrase, “Time is money,” but at Sorbet we say: “Time off is money.”
Did you know you can get a cash advance on your unused Paid Time Off (PTO) when you use a loan alternative like Sorbet? Unlike traditional loans, you’re not borrowing against your paycheck; you’re borrowing against the money you, basically, already have but don't get access to.
Learn more about how sweet it can be to get an advance on your PTO cash with Sorbet today.
5 Possible Loan Alternatives To Consider
#1: Credit Card
Credit cards let you access borrowed funds electronically while making small or large payments back over time.
Credit cards are one of the most common alternatives to personal loans and may be one of the most active ways to build credit. Unlike traditional loans, credit cards allow you a revolving line of credit that can eventually increase so long as you meet the requirements.
The factors that credit card companies consider when deciding your credit limit may include:
Payment history
Current lines of credit
Credit score
Credit utilization
Income
Your credit score may also influence your monthly interest rates and annual percentage rate (APR). An APR is the cost you pay to borrow money and is usually expressed as a percentage rate.
A monthly interest is charged to your balance as a form of payment for accessing the borrowed funds. How much you are charged is calculated by using the average daily balance method.
In some cases, if you pay your entire owed credit before the bill is due you may not have to pay interest. If you do not, no worries. The remaining balance, also known as a revolving balance, is assessed interest.
Pros of Credit Cards
Credit cards give you the ability to:
Actively build credit over time
Control over how much you borrow and how much you pay back
Grant you easy access to immediate funds electronically
Some come with reward points and/or cash-back bonuses
Cons of Credit Cards
Credit cards may have limits and drawbacks like:
Higher interest rates than loans and other loan alternatives
Open access to funds can quickly build debt if you can’t stop spending
Your APR may increase if you can’t make payments
No payments or late payments may negatively affect your credit score
#2: Salary Advance
A salary advance is a financial agreement that allows employees to borrow a short-term loan from employers which is paid back through the borrower’s future paycheck.
Unlike other loan methods, a salary advance generally does not require you to apply for the loan — but you might still have to ask your boss.
Salary advances generally occur through payroll advance programs, or are granted through individual circumstances by the employer. Whether or not you are required to pay interest on a salary advance may depend on whether the advance was facilitated through a third-party lender or directly through your place of employment.
Most employers do not charge interest for salary advances, whereas a third-party lender might, but may charge an administration fee. You could expect to pay a salary advance back in installments or one lump sum via direct payments or deductions from your paycheck.
Pros of Salary Advances
Salary advances give you the freedom to:
Access quick funds for emergency expenses
Borrow money that will not accrue interest
Obtain a cash advance even if you have a low credit score
Cons of Salary Advances
Salary advances may have disadvantages like:
Not every employer offers this loan alternative
Your paychecks will be smaller until you pay off the advance
Your private financial details may be revealed to your employer
Some companies may limit advances based on the purpose for the advance (hospital bills, car repairs, etc.)
#3: 401(k) Loan
Generally, no one plans to access their employment-sponsored retirement funds before retiring, but maybe you’re in a pinch for cash and there are no other options.
A 401(k) loan is a way to access funds that you have contributed as a part of your retirement plan. Consider it as a kind of loan borrowed from your future self but with a few strings attached.
How it works:
You contact your plan administrator and request a 401(k) loan. A loan policy will be drawn up setting the parameters for the loan like limit, interest, and repayment period.
Depending on how much money is in your 401(k), you could borrow up to a $50,000 cap limit or a limit of 50% of your vested balance. So whichever is greater, but no more than $50,000.
You will essentially have to pay income tax twice on the funds you contribute and receive. To make loan payments you have to generate income which is taxed. Then, when you withdraw from your 401(k) for retirement you will have to pay income tax again.
You pay your loan and its interest back into your 401(k) account over a set amount of time per your agreement. If you leave your company before the loan is paid back, you may be required to pay the loan back in full immediately.
The 401(k) interest is paid directly back to you into your account.
You will not accrue growth on the amount you borrowed, only the amount that remains in your 401(k) balance.
Typically, five years is the amount of time you have to pay back what you borrowed from your 401(k), but some plans offer more time. At minimum, your plan may require you to make quarterly payments which may be directly paid or taken out of your paycheck.
A 401(k) loan is different from a 401(k) withdrawal.
Certain circumstances like hardship may allow you to access your retirement funds before the age of retirement (age 59.5 or in some cases age 55). The IRS refers to this as a hardship withdrawal, though some plans may allow for non-hardship withdrawals.
Withdrawing from your 401(k) before the required age may subject your withdrawal to a 10% penalty tax on top of an income tax.
Pros of 401(k) Loans
A 401(k) loan has its perks and flexibilities some of which may include:
A quick and easy loan application process
No credit check or credit score limit is necessary
You pay yourself the interest on the loan
Cons of 401(k) Loans
A 401(k) loan has a few setbacks that may include:
Your borrowing power may be limited
You lose the growth your earnings would’ve made if you didn’t borrow
You may disrupt your retirement plan by borrowing against your savings
Defaulting on this loan may result in heavy tax penalties
If you leave your job you may have to pay the loan back in full in a short amount of time
#4: Personal Line of Credit
A personal line of credit is a type of lending practice where a lending institution allows individuals to borrow up to a certain limit.
Unlike traditional loans, this type of loan allows the borrower to use a revolving line of credit instead of one lump sum amount. Once the personal line of credit reaches the proposed limit, it must be paid off to borrow more.
Personal lines of credit are commonly intended for unexpected expenses that may be sizable. This loan type must be approved by the bank. Interest rates may be lower than that of a traditional loan or credit card, but rates are generally variable which means they are subject to change.
A personal line of credit loan can be useful for:
Situations where costs are not known upfront
Overdraft protection plans
Major expenses like weddings or home improvements
Pros of Personal Line of Credit Loans
The pros of a personal line of credit loan might include:
Lower interest rates than a credit card
Available when you need it for whatever you may need
No need to decide how much you’ll require upfront
Cons of Personal Line of Credit Loans
The cons of a personal lines of credit loan might include:
Maintenance fees may be charged to keep the line of credit open
No credit limit may make it easy to spend more than is affordable
Qualifying criteria may be strict, much like a traditional loan
#5: Peer-To-Peer Loans
Peer-to-peer loans (P2P) are similar to personal loans; only this loan is funded by individual investors rather than a lending establishment.
P2P loans operate on a loan marketplace like Lending Club or Peerform. If you are eligible, you apply for a loan to await approval in a market. Investors then review your profile and application and fund your loan.
Unlike other types of loans, you are borrowing from individual investors. These investors may overlook your credit score and history, which makes this loan alternative useful for those with poor credit.
Pros of Peer-To-Peer Loans
The benefits of peer-to-peer loans might include:
Quick access to funds after approval
Lower credit scores may still qualify
Some lenders allow late payments with no penalty
Cons of Peer-To-Peer Loans
The negative aspect of peer-to-peer loans may be:
No guarantee that your loan will be funded by every platform
You may be charged an origination fee of 1-8%
P2P loans may take a while to review and approve
Possibly the Best Alternative Loan Option: Sorbet’s PTO Cash Advance
How might a PTO cash advance be the best loan alternative for you?
Unlike traditional loans and the previously mentioned loan alternatives Sorbet allows you to access money you’ve already earned. You’re not taking a loan out against your paycheck. You’re just gaining early access to funds that are already yours.
How Sorbet works:
Calculating: Calculate the value of your unused PTO in minutes.
Applying: The application is free with no credit check necessary and non-obligatory. You can change your mind whenever you like with no penalties applied. Just a few clicks and then you’re approved.
Getting paid: In one to five business days a Sorbet Visa will arrive to you with your unused PTO funds as a cash advance. Pay us back when you leave your job, or when your term is up.
Who is eligible:
Individuals 18+
Residents of United States cities where Sorbet is offered*
W-2-paying employees with a salary over $30,000
Individuals with accrued PTO days and a company policy that grants PTO carry-over and payout
*Current cities: Colorado, Florida, Illinois, Massachusetts, New York, New Jersey, Texas and Virginia
Your accrued PTO days might be a huge payout that you don’t have to wait to acquire. And you don’t have to pay your PTO cash advance until you leave your job and get paid for those accrued days anyway!
All that and an interest rate that could cost as little as the amount of coffee from your favorite local spot? It’s no wonder Sorbet may be your best loan alternative for 2024.