Peer-to-peer lending might work for people with solid credit, but if you have a history of late payments you may have to get more creative to find the money you need.
Prosper doesn't lend to people with credit scores below 640. For Lending Club, the cutoff is 660. The companies also impose other limitations. Lending Club, for instance, requires that borrowers have a credit history of at least three years, have no more than six credit inquiries in the prior six months and have a debt-to-income ratio (excluding mortgage) of below 35 percent.
Those restrictions disqualify nearly nine of every 10 applicants. "You can't use this as a last resort," says Peter Renton, who follows the industry at Lend Academy . "If you've taken out six or seven cards and you still need more, you're going to get declined."
There are a number of ways people with poor credit can receive the money they need while improving their credit scores. One way is to join a lending circle run by a community organization.
A lending circle works like this: A group of people gets together and everyone pays a set amount into a pool each month. Those payments are reported to credit bureaus by the organizer, which helps improve the participants' credit scores. Each month a different person gets to take the kitty as their "loan."
Say Mary, Joe, Sue and Bill are in a group and they decide that they will each contribute $50 a month to the circle, for a total of $200. The first month Mary gets the $200 to use as she wishes. The next month it's Joe, then Sue, then Bill. At the end of four months, they've each improved their credit score by paying into the circle on time. The community organizer also helps make sure no one is stiffed if a group member defaults.
Other programs work more like a savings plan, but with regular deposits being reported as loan payments to the credit bureaus. For instance, a nonprofit called Innovative Changes in Portland, Ore., offers " credit builder loans " of $150, which require borrowers to pay $12.50 a month for a year. You don't get the $150 until the end of the year, and you have to pay $50 in fees. But if you pay on time, when you finish the program you will have 12 positive marks on your credit record. You also get free credit coaching and a referral for a secured credit card if you want it.
These resources make a lot of sense for people trying to improve their credit, says Monica Steinisch, senior editorial associate for Consumer Action. "They are great, because the whole idea is to build your credit rating," she says. "They are very limited, but the organizations are very active in trying to get them to spread."
She also recommends secured credit cards as a valuable way to build credit. With those, you deposit money as collateral, then receive a credit card with an account limit that will be equal to, or more than, the deposit, depending on how creditworthy the issuer thinks you are.
To find a lending circle or community financial organization in your area, contact:
- Mission Asset Fund , which partners with local groups to implement lending circles.
- Consumer Action , which maintains a list of local community organizations.
- Local credit unions, local government agencies or local charities such as Goodwill and United Way, to find financial organizations near you.
See related: Should you take advantage of the peer-to-peer loan explosion?