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What Are Unconventional Personal Loans?

What Are Unconventional Personal Loans?
Lauren Ward
Lauren WardUpdated March 3, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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. They 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

Lenders for unconventional loans use different factors to determine if you qualify for a loan. So even if you have bad credit or a poor credit history, you may be eligible. Although unconventional lenders will check to see how creditworthy you are and look at your debt-to-income ratio, they may consider these things differently than a traditional lender does. Unconventional lenders may not require you to have a lengthy employment history. And they might evaluate other unconventional factors, such as whether you have a college degree.Unconventional lenders can vary in terms of their specific requirements. So, for instance, if you’re searching for loans with no collateral, you might find an unconventional lender that will work with you. 

‘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 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, improving 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. Recommended: Is It Possible to Get a Loan Based on Income?

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/ rent
  • Student loans
  • Auto loans
  • Credit card—use the monthly minimum payment amount
  • 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?

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 LoansCons 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

  • Don’t need a high credit score to be eligible
  • May not need to secure the loan with collateral
  • Loan funds are often received very quickly
  • Borrowers may be able to help build their credit history and improve their credit score  

Types of Unconventional Loans

There are two types of unconventional personal loans: secured and unsecured. A secured unconventional 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.In addition to unconventional personal loans, there are other types of unconventional loans for purchasing a home. These loans are designed for people with lower incomes and are easier to qualify for. They are backed by the government and include:
  • FHA loans: these loans allow you to buy a house with a very low down payment
  • VA home loans: these loans are for military personnel to buy a home with no down payment
  • USDA loans: for people with low or moderate income to purchase a home in a designated rural area and require no down payment
  • HUD Section 148 loans: designed for Native Americans, these loans have no minimum credit score limit

The Takeaway

Unconventional loans may be an option for borrowers with a limited credit history 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.

3 Personal Loan Tips

  1. Shopping around helps ensure that you’re getting the best deal you can. Lantern by SoFi makes this easy. With one online application, you can find and compare personal loan offers from multiple lenders.
  2. If the interest rates you’re being offered seem too high, try lowering the loan amount. Generally, the larger the loan, the greater the risk for lenders, who likely charge a higher interest rate for the increased risk level.
  3. Don’t assume that if you have bad credit, you can’t get a personal loan. There are lenders who specialize in bad credit loans.

Frequently Asked Questions

What's the difference between a conventional loan and an unconventional loan?
Is an FHA loan unconventional?
What are the downsides to a conventional loan?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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