What Are Unconventional Personal Loans?
Unconventional personal loans let you borrow a lump sum of money that you repay over time with interest. With unconventional loans, you borrow funds from a nontraditional lender, such as a marketplace lender or a private lender.
Unconventional personal loans can be easier to qualify for than traditional personal loans, and may be an option for borrowers who can’t qualify for a traditional loan. Read on to find out more about unconventional loans, including their pros and cons.
Typical Requirements for Unconventional Loans
Unconventional loans, such as no-doc or stated income loans, typically have more flexible requirements than traditional loans but still require borrowers to demonstrate creditworthiness. Lenders often look at alternative factors like bank statements, cash flow, or asset ownership instead of standard income verification.
A strong credit score, usually 600 or higher, can improve approval chances. Additionally, borrowers may need to provide a larger down payment or collateral to offset the increased lending risk.
‘Fair’ Credit Score or Higher
Unconventional personal loans do have credit score requirements, but they are typically not as strict as they are with traditional personal loans. For instance, you might qualify for a loan with a competitive rate if your credit score is fair. A FICO® score between 580 and 669 is considered fair.
As with any loan, building your credit score may help you receive a better rate on an unconventional personal loan.
Steady Source of Income
For an unconventional loan, such as hard money personal loans, a lender will want to see that you have a steady source of income. Your income can come from a variety of sources, some of which may include:
Pension
Social Security
Disability
Shareholder income
Commission
Alimony
Child support
Rental property income
Hourly wages
Trust funds
As long as you receive income every month, and the amount covers your monthly payments and obligations, the source of your income doesn’t necessarily have to come from a 9 to 5 job in order to qualify for an unconventional loan.
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Low Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is the amount of monthly debt you have in comparison to your gross monthly income (before taxes). To determine your DTI for unconventional personal loans, divide your total monthly debt payments by your gross monthly income.
Use only debts that are owed to creditors or landlords, or those that are court-ordered when figuring out your DTI. These include:
Alimony
Child support
Mortgage or rent
Student loans
Auto loans
Credit cards — use the monthly minimum payment amounts
Personal loans
(Don’t include things like your cell phone bill, utilities, groceries, and internet bills.)
Lenders typically look for a DTI under 36%. If a new loan payment would push your DTI higher than this range, your loan application may be denied. In that case, consider borrowing a smaller amount.
How Do Unconventional Personal Loans Work?
Unconventional personal loans are similar to how personal loans work. When applying for unconventional loans, lenders will first usually do a soft check of your credit and look at your DTI. Next, you’ll fill out an application. The lender will then do a hard credit check, which will drop your credit score, but only temporarily.
After you’re approved for an unconventional loan and the funds are disbursed, you will be required to make monthly payments with interest until the loan is fully paid off.
Traditional vs Non-Traditional Lenders
A traditional lender is a bank or credit union. A non-traditional lender is a private lender, or a marketplace lender. Marketplace lending is usually an online platform that connects lenders with borrowers.
Pros and Cons of Unconventional Personal Loans
With unconventional personal loans, you may be able to get a loan with no collateral when you are unable to get a loan from a traditional lender. However, these loans may have a high APR (annual percentage rate) and fees.
Pros of Unconventional Personal Loans | Cons of Unconventional Personal Loans |
|---|---|
• May not require collateral • Transparent pricing and fees • May help build a borrower’s credit score and credit history | • May come with a high APR • Borrowers may not qualify for advertised rates • May come with high lender fees |
Reasons to Consider an Unconventional Loan
Do not need a high credit score to be eligible
May not need to secure the loan with collateral
Loan funds are often received quickly
Borrowers may be able to help build their credit history and credit score
Types of Unconventional Loans
There are two types of unconventional personal loans: secured and unsecured. A secured loan requires the borrower to use collateral, such as their house or car, to secure the loan. These loans often come with good interest rates. However, if you default on the loan, the lender could seize your collateral.
Unsecured unconventional loans require no collateral. However, you may end up paying more in interest with an unsecured unconventional loan.
Recommended: Average Personal Loan Interest Rate
The Takeaway
Unconventional loans may be an option for borrowers with a limited credit or employment history. Lenders typically don’t have strict eligibility requirements for unconventional loans. However, borrowers who take out certain unconventional loans may end up paying more in interest and lender fees, which can affect the total cost of the loan. If you’re in need of financing, it’s wise to explore all your options carefully.
If you’re considering a traditional personal loan, Lantern by SoFi can help. By filling out one simple form, you can quickly and easily compare personal loan rates and terms from multiple lenders at once.
Explore personal loan options and rates with Lantern.
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