Millions of Americans are still suffering from the credit crunch, facing high debt and unable to pay it off at interest rates of 27.99 % and higher. Bankruptcy is not the one-stop cure-all it once was, erasing debt easily and completely. Like bankruptcy, debt consolidation can ruin your credit rating, because you can’t consolidate through a third-party firm until you’re three months in arrears.
If you’re in debt, or if you need money for upcoming expenses such as home repairs, what’s the solution? Some are turning to peer-to-peer lending websites to get the funds they need.
Let’s take a look at the peer-to-peer online lending concept from the standpoint of borrowers. Is it a good value?
Borrowing through Peer-to-Peer Lending Websites
The advertisements for peer-to-peer lending websites sound enticing, offering “low interest rates” for borrowers. But LendingClub.com’s lowest interest rate is 6.78% APR, lower than the top-tier credit cards, which typically have variable APRs between 9% and 15%. You’d need excellent credit and a three-year loan for a fairly small amount to earn the lowest APR at any of these websites. In reality, you’re more likely to get an interest rate in the high teens or even 20-percent range.
Prosper.com and LendingClub.com at a Glance
Let’s take a look at some of the differences between two of the largest peer-to-peer lending sites, Prosper.com and LendingClub.com.
Prosper.com Details for Borrowers
- Fixed loan rates from 6.59% to 35.80% APR
- Pay by check or automatic withdrawal from your bank account
- Returned payments result in $15 fee
- Payments made 15 days late or more will be charged late fees,which are passed on to the investors
- Prosper.com uses Experian ScoreX Plus credit score (300 – 900 points) to assess borrower’s risk
LendingClub.com Details for Borrowers
- Interest rates range from 6.78% APR to 27.99% APR, with 36- or 60-month loans available
- Payments made automatically through your bank account; check payments have a $15 additional fee per month
- Unsuccessful payment fee of $15
- Late payment fee of 5% of the unpaid payment or $15, whichever is greater
- Uses FICO score (300 – 850 range) and a letter grade to assess borrower risk
Alternatives to Peer-to-Peer Lending
Peer-to-peer lending may be a good idea for those with existing debt, who want to avoid bank fees or loan closing hassles, or who don’t feel they have the discipline to make regular monthly payments beyond the minimum amount due to pay off credit card debt. In fact, the majority of users (75% or more) borrowed money to pay off credit card debt or do their own debt consolidation.
One benefit to peer-to-peer lending is that the debt is unsecured, so you’re not putting your house on the line by re-financing and pulling equity from your home to pay off higher interest debt.
But with bank interest rates still extremely low, a home refinance or Home Equity Line of Credit may be a wiser decision, especially if you can refinance with no closing costs.
Another alternative, if you have excellent credit, is to take advantage of a zero interest credit card offer, and aim to pay off the debt during the introductory period. At the end of the period, if you still have debt, you can re-visit the possibility of peer-to-peer lending, with an even higher credit score thanks to another 12 months of on-time credit card payments.
If a peer-to-peer lending site offers you an interest rate higher than your existing credit cards, you’re better off creating your own debt re-payment plan by making steady credit card payments monthly. Eventually, you’ll get a better credit card offer and can continue making the same payments at 0 percent interest and see your debt disappear.
As with any financial decision, you have to assess your situation, look at the offers available, and make your choice based on math. The good news? Applying for a loan through any of the peer lending websites is considered a “soft” credit inquiry, so you won’t hurt your credit score by checking to see your interest rate if you did apply for a loan. In this case, it really doesn’t hurt to ask.