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If you’ve ever wanted to borrow money at a reasonable interest rate but have been denied because of limited credit, income or employment history, the latest generation of marketplace lenders might be able to help.
Vouch, Earnest and Upstart consider factors such as where applicants went to college, what they majored in, whether they’ve received a job offer and whether friends and family will attest to their creditworthiness. If you seem like a “future prime” borrower, you have a good shot at getting one of their unsecured personal loans.
To find the best rates on personal loans, shop around at Bankrate.com.
Marketplace lenders face less scrutiny than big banks, which means more flexibility in making changes and implementing “outside of the box” processes, says Traci Cox, a vice president at Digital Risk, a risk analytics firm in Orlando.
Here’s how these lenders work:
- Vouch is “taking lending back to its roots” when loan approval was based on the applicant’s character and the trust of their personal network. You must get at least 1 friend or family member to “sponsor” you. A sponsor is sort of like a co-signer — they pay if you don’t — but they’re never on the hook for the whole loan. They’re responsible for only the sum they’ve committed to. Sponsors typically pledge around $100. The more sponsors you get, the lower your rate, the more you can borrow (from $500 to $15,000) — or both.
- Earnest offers loans from $2,000 to $50,000 using “hyper-personal underwriting.” It asks for information that’s “more comprehensive” than what traditional lenders request and examines “thousands of data points for each individual,” including schooling, current and previous pay, savings, debts and work history. You grant Earnest access to your LinkedIn profile and your bank and credit card accounts (similar to online budgeting program Mint). The application is thorough: If you say your loan is for a vacation, it asks where you’re going, for how long, what your trip budget is and whether you’re getting paid time off. Earnest will consider your application if you’re not working but have an offer letter for a job.
- Upstart lends sums from $3,000 to $35,000 based on the premise that “your education and experience help you get the rate you deserve.” It considers your education, area of study and job history when evaluating your application. Like Earnest, it also considers your prospects. If you aren’t working yet but have a job offer, this lender will still consider you.
Marketplace lenders let some borrowers have personal loans at reasonable rates with no collateral when they can’t get approved by a bank. These companies keep rates low through their online-only presence and a thorough underwriting processes that weeds out fraud and risky borrowers.
Another benefit is transparent pricing, with fixed interest rates and no hidden fees. Upstart charges an origination fee of 1% to 6% of the amount borrowed depending on the loan grade. Vouch’s origination fees are similar: 1% to 5%. Earnest has no origination fees.
A thin credit file is a problem for many borrowers whom these lenders target. Earnest reports payments to Experian, while Vouch reports to Equifax and Upstart reports to TransUnion, according to spokesmen for the 3 lenders. That means making timely (or late) payments can help (or hurt) your credit, but only with 1 bureau.
Earnest lets you explain your personal circumstances when you apply. For example, it asks if you’ve missed any payments in the past 5 years. If you answer yes, you can type 2 to 3 sentences to explain why you fell behind.
Vouch offers a solution to the awkwardness of asking friends or family for money. If they aren’t comfortable mixing relationships and finances, they can politely decline when Vouch emails them on your behalf. Those willing to help aren’t actually lending you money, never pay you directly, don’t learn any details about your finances and are responsible for only a small amount if they sponsor you and you default.
While you may be more likely to be approved with one of these lenders, your rate might be higher than if you worked on your credit first, before applying for any loan, says Thomas Nitzsche, a financial educator with Atlanta-based ClearPoint Credit Counseling Solutions. You can get your credit report for free at myBankrate.
The type of borrowers banks typically reject might not qualify for the best rates marketplace lenders advertise: 4.7% APR with Upstart, 7.35% APR with Vouch and 4.25% APR with Earnest.
But Upstart’s average APR is 16% and its APRs go as high as 29.99%. Vouch’s highest APR is also 29.99%; its average is 18.19%, a spokesman says. Earnest’s highest rate is significantly lower: 9.25% on a 3-year loan.
Even if you can’t get a better rate than you could on a credit card, a personal loan may be a better option, says John Laurito, president and CEO of Concord Wealth Management in Waltham, Massachusetts. The personal loan has a specified payoff period; a credit card can lead borrowers to keep the debt longer and pay more interest over time.
Plus, “the convenience of carrying around a credit card can lead you to rack up more debt than you had planned when you succumb to those impulse purchases,” he says.
Credit score requirements
Earnest doesn’t have a minimum credit score requirement and will consider applicants with no score who have enough other data to prove creditworthiness, according to a spokesman. But Upstart has a minimum of 640, although the lender will consider applicants who don’t have enough credit history to have a score, and Vouch requires a 600. Unconventional factors may help you get approved, but traditional ones still matter.
“Historically, there is a link between credit score and ability and willingness to repay debt, which is why a credit score still remains a critical characteristic in loan qualification,” Cox says.