If you’re looking to save money by paying off high-interest credit card debt, or you need cash to fund a major purchase, then getting a personal loan may be your best option. However, if you have little or no credit history or just started working your first real job, then getting approved by a bank or credit union can be a time-consuming headache, if you get approved at all. Many banks still expect you to apply in person and judge you only by your credit score. But all may not be lost if you are unable to obtain financing from a conventional institution. A new breed of lenders has appeared in the marketplace that use a slightly different set of criteria which may be more favorable for borrowers who can demonstrate financial potential and soundness of character.

When to Get a Personal Loan

Personal loans can be a savvy financial move if you want to consolidate high-interest debt, purchase big-ticket items like furniture or make home improvements. Rather than put everything on a credit card, they can also help you pay for medical expenses, security deposits or other expenses related to starting up a new job or business or relocation. But it can be almost impossible in many cases to get any kind of loan for many of the expenditures listed here, because the only traditional lenders who will finance you are credit card companies — and you have no intention of racking up debt at their interest rates. (For more, see: Personal Loans: To Lend or Not to Lend?)

The Alternative Solution

The subprime mortgage meltdown and the Great Recession have combined to deliver a one-two punch to those with short credit histories, as lending guidelines are now considerably tighter and jobs are still scarce. Therefore, younger borrowers who have recently completed their schooling often face a nasty predicament when they try to get loans from traditional lenders. The alternative lenders listed here recognize the needs of this group and have incorporated nonstandard factors into their proprietary underwriting models in order to better find and accommodate prospective borrowers who show a level of professional and financial promise that cannot be seen in their credit scores. Some of the nonstandard factors that these companies look at include:

  • Grades and GPAs
  • Scores on standardized tests
  • Bank and investment account balances
  • Budgets and personal spending habits
  • Income, job history and professional achievements
  • Residential and relational/marital history
  • LinkedIn Corp. and other social media profiles

Some critics have argued that the use of these nonstandard factors can harm borrowers because much of this kind of information is not protected under the Fair Credit Reporting Act that requires lenders to disclose the data that they obtain as well as their underwriting methods to the public. Borrowers may get rejected for a loan because of faulty or incomplete information that is obtained and the lender won’t be required to disclose to the borrower why, or give the borrower a chance to verify the information that was used. Nevertheless, these lenders have helped numerous borrowers obtain much-needed financing on reasonable terms that they could not have found elsewhere. (For more, see: The Importance of Your Credit Rating.)

Alternative Lenders

If you are looking for an alternative source of financing, take a look at the following companies.

Founded in 2011 by four partners at Stanford University, this dynamic company has taken the lending industry by storm. SoFi offers mortgages and student loans as well as personal loans, and it was the first lender to offer refinancing for both private and federal student debt. SoFi has already funded over $4 billion in loans and has been named to CNBC’s Disruptor 50 and The Wall Street Journal’s Billion Dollar Startup Club. Their ultimate objective is to help high potential, career-oriented borrowers pay off their debt and move forward with their financial lives as soon as possible. If you have finished school and have a professional or advanced degree and decent earning potential, then this is a good place to start shopping for a loan. The other key reason SoFi has been so successful is because it offers some of the lowest rates in the business with no application or origination fees. Their fixed-rate loans run from 5.5% to 9.99% annual percentage yield (APY) and their variable rate notes start at 4.05% and top out at 8.05% APY.

Both types of loans are available in 3, 5 and 7 year terms, and loan amounts range from $5,000 to $100,000. And should you happen to lose your job after getting approved, SoFi will stand behind you by offering a possible deferment of payments for up to a year. They will even provide you with career, branding and resume coaching as an additional aid in your job search.

Launched in May of 2012, this online lender is one of the newest companies of its kind. The best borrowers can qualify for an APR as low as 4.7%. All loans have 3-year terms and the average APR is around 15%. There is also a one-time origination fee of anywhere from 1-6% that is included in the APR calculation and loan amounts range from $3,000 to $35,000. However, while they also charge a fee for late payments, there are no prepayment penalties. Borrowers can manage their loans at any time using the digital client dashboard that is available on their site. Upstart also functions as an investment platform by offering accredited investors seeking higher returns in the private sector a chance to supply the capital to one or more of their loans with a moderate level of risk. (For more, see: 7 Unconventional Ways Businesses Can Borrow Money.)

This company offers personal loans and student loan refinancing, and focuses more exclusively on applicants who can live well below their means and show a solid history of financial responsibility in all areas of their lives. By looking at real-time cash flow, savings, investment and other financial and educational data, Earnest is able to reward financially responsible young people – regardless of credit score – with lower rates and fairer terms. Their rates range from 4.25% to 9.25% with no origination or prepayment fees and 1, 2 and 3-year terms. Loan amounts can range from $2,000 to $50,000. Common uses for an Earnest personal loan include career development, moving, home projects and remodels and major life events like weddings.

In an effort to reach out to potential borrowers with poor credit, this firm uses an unconventional strategy that allows them to obtain financing with APYs as low as 5%, provided that the borrower can get family members or friends to “vouch” for them with the company by pledging to repay a certain amount if the borrower defaults on the loan. Of course, the more and better sponsors that the borrower can find to pledge, the lower the interest rate that is charged. Rates can go as high as 30 percent and loans range from $500 to $15,000. Terms go from one to three years and origination fees start at one percent and can go up to 5%. Vouch’s ultimate objective is to give borrowers who have made mistakes in the past a second chance if those people have learned, changed or grown enough to be able to convince others to back them financially. (For more, see: 5 Keys to Unlocking a Better Credit Score.)

Founded by PayPal cofounder Max Levchin and Palantir cofounder Nathan Gettings, this company focuses exclusively on very short-term loans for online or in-store purchases, with terms of 3, 6 or 12 months. Student loans are offered in 12-, 18- and 24-month terms. Interest rates are in the 0% to 30% range and there are no fees. This company also differs from its competition in that there is no hard dollar limit on the amount that can be borrowed. Each loan is underwritten in real time to the item, the merchant and the borrower. Each borrower is assigned a personal limit based upon their underwriting model. But pricing is completely transparent; the total dollar amount of each loan including principal, interest as expressed in APR (as required by law) and total dollar amount, as well as user selected term options is listed beforehand when the borrower applies for credit. This way, the borrower actually sees the dollar amount of interest instead of just an APY that is given for credit card purchases.

Affirm also claims that their simple interest loans are cheaper for consumers than credit cards. Take a $400 pair of shoes for example. At 15% APR, a user would pay 2.50% in simple interest or $10 over three months or 8.5% simple interest or $34 over 12 months. Affirm says their underwriting and credit models allow them to extend credit to far more creditworthy users than FICO.

The Bottom Line

The market for alternate lenders has grown rapidly in the wake of the Great Recession despite some misgivings from consumer advocates. If you can’t get a loan from your bank or credit union, one of these companies may be able to help you if you are financially responsible and just haven’t had a chance to establish a solid credit history. (For more, see: The Pros & Cons of Personal Loans vs. Credit Cards.)