If you tried to borrow money at a reasonable interest rate from a traditional lender but were denied because of limited credit, income or employment history, the latest generation of personal loan lenders might be able to help. These so-called “unconventional personal loans” could be your best shot at getting a good interest rate and unique perks.
What is an unconventional personal loan?
Like a traditional personal loan, an unconventional personal loan lets you borrow a fixed amount of money from a lender. You’ll need to repay the loan, plus interest charges that accrue, within an agreed-upon time frame. The borrowed funds can be used toward upcoming purchases, like a car repair, medical bills or other large purchases.
Unconventional personal loans, however, differ in two key ways: The money is borrowed from nontraditional lenders, such as marketplace lenders, and these lenders focus on unconventional factors, data points and personal information to evaluate the loan applicant. In short, many of these online lenders offer additional personal loan options for those who would otherwise not qualify at a traditional bank.
How do personal loan approvals usually work?
After receiving your personal loan application, a lender typically runs a “soft pull” on your credit. Based on the information you provided in the application and the soft credit pull, lenders let you know whether you’re qualified for a personal loan.
During this step, lenders also evaluate your debt-to-income (DTI) ratio to see if you can afford to repay the loan alongside your existing monthly expenses. If you qualify, the lender will share the APR and loan terms it can offer. If you choose to move forward with the application, lenders conduct a “hard pull” on your credit history and might ask you for additional documentation to make a final decision.
Unconventional personal loan lenders may take all of this information into account, but they may weigh those factors differently. They may also approve you based on things like your career or college degree.
Unique personal loan lenders
Avant, LendingPoint and Upstart are examples of online lenders that offer personal loans for borrowers without strong credit. Here are a few key details about their unconventional personal loan options.
|Lender||Minimum Credit Score
||APR||Term||Maximum Loan Amount
|Avant||580 FICO and 550 Vantage||9.95%–35.99%||2 to 5 years||$35,000|
|LendingPoint||585||15.49%–35.99%||2 to 4 years||$25,000|
|Upstart||600||7.35%–35.99%||3 or 5 years||$50,000|
Each lender has its own eligibility requirements and underwriting criteria for personal loans. For example, Upstart considers 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 these lenders’ unsecured personal loans. To find the best rates on personal loans, make sure to shop around.
Avant lets you borrow loans from $2,000 to $35,000 on unsecured loans. Borrowers can choose loan terms as short as two years to lessen the interest charges over the life of the loan. The lender charges an administration fee of up to 4.75 percent, which you should calculate into your budget before accepting a loan offer. According to the lender, funds are disbursed quickly — as soon as the next business day after your loan is approved.
It also offers a secured personal loan. Secured loans require collateral, which is claimed by the lender if borrowers default on their loan. If you’re interested in getting a secured personal loan through Avant, you can use your car as collateral. The APR on secured loans are 9.95 percent to 35.99 percent for loans between $5,000 and $25,000. Since this loan option is secured with collateral, the administration fee is only 2.5 percent, and you might qualify for a lower APR than with an unsecured loan.
LendingPoint specifically tailors its unconventional personal loans to borrowers who are considered “near-prime.” Generally, if your credit score is 620 to 659, you’re a near-prime borrower, according to the Consumer Financial Protection Bureau. However, LendingPoint has been known to offer loans to people with credit scores as low as 585.
The lender evaluates personal loan applications based on your job history, financial history, income and credit. Loan amounts range from $2,000 to $25,000, and there are no prepayment penalties if you choose to repay your debt sooner. Keep in mind that, depending on where you live, you may incur an origination fee of up to 6 percent.
Upstart lends sums from $1,000 to $50,000 and offers “fair and fast personal loans.” Although it requires a minimum credit score of 600, the lender also considers your education, area of study and job history when evaluating your application. If you aren’t working yet but have a job offer, this lender might still consider you.
Upstart specializes in quick funding; it claims that 99 percent of its personal loans are disbursed just one day after approval.
Benefits of an unconventional personal loan
Some online lenders let borrowers get 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 thorough underwriting processes that weed out fraud and risky borrowers.
Another benefit is transparent pricing, with fixed interest rates and no hidden fees. For example, LendingPoint clearly states that it charges an origination fee of 0 percent to 6 percent of the amount borrowed, depending on your state.
Lenders that fund unconventional personal loans target borrowers with a thin credit file, which removes a typical obstacle to getting approved. Getting approved for an unconventional personal loan can also help build your credit score and history, because these lenders report your loan activity to credit bureaus they work with. These regular updates to the credit bureaus let you build your credit history and payment history. Some lenders report to all three bureaus, while some report to one or two.
Drawbacks of an unconventional personal loan
Although you may be more likely to be approved for an unconventional personal loan with one of these lenders, your APR might be higher than if you had worked on improving your credit before applying for any loan.
What’s more, the type of borrowers that traditional banks typically reject might not qualify for the best rates that online lenders advertise. For example, although the minimum APR offered by LendingPoint is 15.49 percent, your loan APR is based on your specific credit, income and DTI situation — meaning you’re not guaranteed the lowest APR. You could pay as high as 35.99 percent APR.
Perhaps the biggest drawback is that many unconventional personal loan lenders operate entirely online, meaning you’ll have to conduct all business through email or over the phone. Some people prefer to get help in person, and having a relationship with a local bank may also improve your chance at qualifying for a good interest rate.
Credit score requirements
Even though some online lenders target borrowers who might not qualify with traditional lenders, unconventional lenders still have credit requirements you’ll have to meet.
For unconventional personal loans, you’ll likely need at least a “fair” credit score to get approved for a competitive rate and terms in this category. A FICO score of 580 to 669 is considered “fair.”
Some lenders might consider applicants new to borrowing (i.e., those who don’t have a credit score) on a case-by-case basis. Unconventional factors, like your areas of study at college or work history, might help you get approved, but traditional ones — like a credit score — still matter.
Alternatives to a personal loan
A personal loan isn’t the only way to get access to cash. If you have fair credit, you might also:
- Apply with a co-signer. Leverage the creditworthiness of a co-signer who has a strong score and regular income. When a co-signer agrees to be liable for payments if you default, it presents a lower risk for lenders to loan you money.
- Get a secured credit card. A secured card requires you to provide a cash deposit that you’ll use as your available credit on your credit card. This is a helpful way to build credit while having the convenience of a cashless payment method. This alternative is less useful, however, if you are looking for a fresh loan above the amount of money you can put down on a secured credit card.
- Become an authorized user. If you simply need access to credit and aren’t ready to sign up for a card on your own, you can ask to be an authorized user on someone else’s card account. Some creditors report credit data of authorized users to credit bureaus.
- Use your home’s equity. Homeowners can borrow against their home’s equity through a home equity loan. Home equity is the market value of your home minus what you owe on it. It offers a fixed loan amount at a fixed interest rate. However, make sure you can repay the loan; otherwise, the bank can foreclose on your property.
- Raise your credit score. If your need for a personal loan isn’t urgent, one way to get competitive loan terms is to improve your credit score. Build your FICO score to at least 670 — which is what FICO considers “good” — to broaden your personal loan options.