Why lenders could be using your friends to determine whether to approve your loan

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For years now creditors, have told people looking for loans to come to the table with some collateral, a decent credit history and, in some cases, even a bag of money. But there’s another criterion that lenders are increasingly using to gauge credit-worthiness: Your friends.

People applying for auto loans and even mortgages say they’re being asked to provide personal references. You are probably familiar with this practice being part of the job-hiring process. Employers may call your references so that they can vouch for your employment history, skills and even your integrity.

But when it comes to loan companies, they’re likely using those personal references for something else entirely.

Your credit-worthiness could be determined by the company you keep

“There’s a new algorithm that goes beyond credit scores,” money expert Clark Howard says.”They believe they can determine how good a payer you’re going to be by the company you keep. The idea is that they believe that you won’t more readily make late payments or default on your auto loan based on your friend group.”

Clark says the loan companies don’t usually contact the references.

“They may not ask anything, they’re just going to check them out,” he says.

So, the next time you apply for a loan and are asked for personal references, you may want to be a bit judicious when selecting your contacts.

Looking for a loan? Here are some unconventional options

People looking for loans have several unconventional options that were unavailable to the masses a generation ago. Here are three services that we’ve written about in the past.

LendingClub.com: This crowdfunding site has grown tremendously in the last few years. Small businesses can borrow more than half a million dollars to get their firms off the ground.

Karrot.com is a platform that connects small businesses to funding through the online business lending site Kabbage.

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Try an online bank: There are several online banks that offer the same amenities of the brick-and-mortar variety, but without all the fees. Many of them, such as Radius and USAA, also offer personal loans.

RELATED: Here’s how to get truly free checking 

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