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credit & debt

A New Way to Borrow Money

You can get a loan through a social-networking site or state program and repay it with a specified percentage of your future income.

When Nathan Sharp took out a loan to launch his price-tracking site, Nifti.com, he didn't agree to pay back principal plus interest. Rather, he's paying 2.5% of his salary for ten years to backers he met through the money-lending platform Upstart. The arrangement includes guidance from his sponsors. "It made sense from a financial and mentorship perspective," says the Boston-based Sharp.

Borrow now and repay a cut of your income later: It’s a new trend as student debt overwhelms starting salaries. Borrowers with Upstart pay up to 7% of their income for a decade, capped at five times the original loan amount. If their salary falls below $30,000, they get a pass, with skipped years added to the repayment term.

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Upstart, based in Palo Alto, Cal., is one of several such platforms. States are getting into the act, too. Oregon's Pay It Forward, Pay It Back is slated to start in 2015. In exchange for paying no tuition or fees, graduates of state schools will pay a proposed 3% of income for 24 years. California and Pennsylvania are considering similar plans.

Such loans sound affordable, but as income grows, they can cost a lot more than traditional student or other loans. "Borrowers aren't going to starve because of these loans," says Jonathan Frutkin, CEO of Cricca Funding, a crowdfunding consulting firm. "But they may hinder saving for vacation, buying a house or putting away money for retirement." A better bet: Focus on affordable college options in the first place.

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