Two New Approaches to Personal Loans
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A couple of weeks ago a perplexed reader contacted me because he and his wife, with mid-700s FICO scores, professional careers, no debt, and ample monthly income were denied a $20,000 personal loan by their major international bank.
While interest rates hovered at historic lows, homeowners established home equity lines of credit (HELOCs). Home equity loans provide access to cash when it's needed and eliminate dealing with unsympathetic bankers, who have a reputation for treating personal loan applicants as pariahs.
Seven drops in the Fed Funds rate since September and a correspondingly lower LIBOR (London Interbank Offered Rate) Index have mitigated interest on HELOCs. However, many lenders have severely cut the maximum amount of equity available to borrowers or they've cancelled home equity loans altogether.
While traditional bankers ignore the consumer need that home equity loans fill, two fresh approaches to lending thrive in the financial marketplace. These companies understand that having excellent credit does not mean you're wealthy; it means you manage your money responsibly. And you'll probably need a personal loan occasionally.
In an interview on CNN recently, Chris Larsen, the CEO of Prosper, the premier people-to-people lending marketplace, said they have seen a change in their borrower demographics during the past 12 months as access to home equity has diminished.
Prosper was established to make consumer lending more financially and socially rewarding for everyone. It provides an open Web forum where potential borrowers explain their loan needs and individual lenders agree to provide a portion of the funds. Originally, they attracted a high percentage of credit challenged borrowers. "Now," Larsen said, "many of their borrowers have excellent credit."
Although people-to-people lending requires public disclosure of your need and interest rates tend to be comparable to credit cards, a tour through the Prosper Website will convince you that they fulfill a borrowing need and many people are willing to lend.
Simultaneously, FirstAgain, the first online consumer lender offering unsecured paperless loans only lends to customers with excellent credit. Founded by the seasoned credit professionals who started the first online auto loan company (which they grew into the largest online auto lender prior to acquisition), they are dedicated to revolutionizing lending again.
Auto loans are secured by titles on cars. Managing and maintaining all that paper requires immense overhead. They wanted to eliminate the expense and hassles of holding titles. How do you do that? Unsecured loans. No paper. It turns out that reducing overhead means you can offer lower interest rates on personal loans. Looking for comparisons, I found FirstAgain interest rates range between 30 and 60 percent below other lenders. And it's green. No paper saves forests. In addition, the company plants a tree for every loan they fund.
It's been three years since CEO, Gary Miller, met with his former management team to brainstorm about a new company. Their focus then and their ongoing commitment today: deliver the best customer experience. This culture of care causes FirstAgain to stand apart with easier processes and a more personalized approach to borrowers.
Most financial institutions base loan decisions primarily on your credit ratings (FICO scores) and how much debt you owe compared to your income (debt to income: DTI). FirstAgain has developed proprietary lending algorithms that consider your FICO scores and DTI plus dozens of other life factors, which contribute to the likelihood that you will repay a loan. While it's an Internet-based company, the FirstAgain lending model resembles an era when your neighborhood banker knew you and based lending decisions on you as a person rather than you reduced to a few numbers.
If you have a solid credit history and want to borrow between $10,000 and $100,000 to use for anything (Yes, anything.) from a lender that doesn't charge fees, points or prepayment penalties and won't ask you for collateral, check them out.
Over time, it is likely that standards established by FirstAgain will be adopted by other lenders. For now they're in a unique lending class that benefits you, a borrower with excellent credit.
Rest assured, every online loans application is protected by 128-bit encryption software.
