What is an unconventional personal loan? An unconventional personal loan is a type of lending option that breaks away from the normal traditional lending practices. Instead of being offered loans by popular banks or credit unions, this type of personal loan often comes from nontraditional lenders such as peer-to-peer lending platforms, online lenders, marketplace lenders, or even community-based organizations.
Unconventional personal loans usually offer more flexible terms. And can cater to people with financial situations, like individuals with poor credit or irregular incomes. This makes this type of loan an accessible option when standard loans aren’t available.
Understanding Unconventional Personal Loans
Just like traditional personal loans, unconventional personal loans enable people to borrow a fixed amount from a lender. You will have to pay back the loan with interest charges that accumulate within the specified period. They are very good options for people who cannot qualify for or get a traditional loan. This type of loan can be used for purchases such as medical bills or car repairs.
If you tried to borrow money from a traditional lender at a reasonable rate but were denied, unconventional personal loans could be a good option. With these lending options, you could get affordable interest rates and amazing perks.
Requirements for Unconventional Loans
Non-traditional lenders that offer these types of loans use different factors to check if an individual qualifies for a loan. So, even if you have a poor credit history or bad credit, you have absolutely nothing to worry about. Although these lenders will check to see how worthy you are and take a look at your debt-income ratio, They might consider things very different compared to a traditional lender.
Keep in mind that unconventional lenders may not mandate that you have a long employment history. And they may check other factors, like whether you have a college degree. Also, note that lender options can vary in terms of certain requirements. For instance, if you are looking for a loan without collateral, you may find an unconventional personal lender that will offer you good rates.
Fair Credit Score or Higher
Non-traditional lenders will consider your credit score, but they are usually more lenient than traditional loans. You can qualify for an affordable rate even with a credit score that is between 580 and 669 on the FICO® scale. However, keep in mind that improving your credit will get you better rates on these loans, just like with any other type of loan.
Steady Source of Income
To qualify for this type of loan, such as a hard-money loan, lenders need to see that you have a steady income. Your source of income can come from various sources, including:
- Pension
- Social Security
- Disability payments
- Shareholder income
- Commissions
- Alimony
- Child support
- Rental income
- Hourly wages
- Trust funds
As long as you get paid monthly and it covers your payments and obligations, it doesn’t need to come from a traditional 9-to-5 job for you to qualify for an unconventional loan.
Low Debt-to-Income Ratio
Your debt-to-income ratio is very important for unconventional personal loans. To calculate your DTI, you will have to divide your total monthly debt payments by your gross monthly income (before taxes). Only include debts owed to creditors, landlords, or those that are court-ordered, like:
- Alimony
- Child support
- Mortgage or rent
- Student loans
- Auto loans
- Credit card minimum payments
- Personal loans
You don’t have to include fees such as cell phones, utilities, groceries, and internet. Lenders usually prefer a DTI under 36%. If a new loan repayment raises your DTI above this, it might be very difficult to qualify.
How Does an Unconventional Personal Loan Work?
When you want to apply for an unconventional loan, the non-traditional lender usually starts with a soft credit check. And just as written above, it looks at your debt-to-income ratio (DTI). Then, you’ll complete an application, and the lender will do a hard credit check, which might lower your credit score a bit, but only temporarily. Once you’re approved and receive the funds, you’ll need to make monthly payments with interest until the loan is fully paid off.
Types of Unconventional Loans
Just so you know Unconventional personal loans come in two different forms: secured and unsecured.
- Secured Loans: For secured loans, you need to provide the lender with collateral such as your house or car. These types of loans do come with lower interest rates, but if you do not repay the loan, the lender can take your collateral.
- Unsecured Loans: For this type of loan, no collateral is needed, but they do come with higher interest rates.
Other Unconventional Loans
Apart from personal loans, there are unconventional home loans designed for people with lower incomes, backed by the government, and easier to qualify for:
- FHA Loans: You can purchase a house with a very low down payment.
- VA Home Loans: Mainly designed for military members, they allow them to purchase a home with no down payment.
- USDA Loans: For low- to moderate-income home buyers in rural areas, with no need for down payments.
- HUD Section 184 Loans: Specially designed for Native Americans, with no minimum credit score required.
Conventional vs. Unconventional Loans
Conventional loans are the types of loans that are typically offered by traditional banks or credit unions. They mostly require borrowers to have a strong credit score and a stable source of income. Meanwhile, unconventional loans are typically provided by marketplaces, private lenders, or the government. Unlike conventional loans, these loans do not require the borrower to have a high credit score or a long employment history.
Benefits of an Unconventional Personal Loan
Just as I have mentioned above, most online lenders provide personal loans at reasonable rates without the need for collateral, especially for people who can’t get approved by traditional banks. These lenders keep rates low by operating just online. And making use of thorough checks to avoid fraud and high-risk borrowers.
Another good thing is the clear pricing, with fixed interest rates and no hidden fees. For example, LendingPoint charges an origination fee that ranges from 0 to 6 percent of the loan amount, depending on your location.
These lenders also offer loans to borrowers with limited credit histories, removing the difficulty of approval. Additionally, applying for and getting an unconventional personal loan can help improve your credit score and history since these lenders report your activity to the credit bureaus. These reports can help build your credit record and payment history. Some lenders report to all three major bureaus, and some to one or two of the bureaus.