When Michelle Watson compared her auto loan interest rate along with the interest rates on her two credit cards with those offered by a leading peer-to-peer, or P2P, lending site, her jaw dropped as she realized she had been throwing her money away on exorbitant interest rates for years. Needless to say, she realized using the peer-to-peer lending service was a no-brainer.
"All of the interest rates I had been paying were much higher than the Lending Club rates. With one monthly payment instead of three, my repayments were simplified as well," she said on her blog, hoping to help others who are also struggling with credit card debt that never seems to go away.
As the owner of a blog that highlights her journey of becoming a debt-free single mother, Michelle is quite particular about the financial products and services she recommends to her readers. However, she is more than animated in her support of P2P lending.
In fact, after her loan was funded in only two days and paid off in eight months, Michelle decided to become a peer-to-peer investor herself. In the past year, she has helped fund nearly 50 notes, enjoying a net annualized return of approximately 10 percent.
Basics of Peer-to-Peer Lending
Michelle is part of a growing number of individuals who are saying goodbye to credit cards and turning their backs on the banks, instead choosing to turn to individual investors for the funds they need to consolidate their high-interest credit card debt, take a much-needed vacation, or achieve their dreams of starting their own business.
What began as a sideshow in 2006 has evolved into a full-fledged industry that provides obvious benefits for both investors and borrowers. At the moment, the two largest names in the peer-to-peer lending space are Lending Club and Prosper, which have nearly $2 billion in funding under their collective belts.
The premise behind P2P lending is rather simple. Borrowers simply fill out an online application detailing the desired amount and the reason for the loan. Then, investors review the applications and decide to lend money to applicants they deem worthwhile. Often, even people with a less than stellar credit score can receive funding simply by providing a compelling story.
As the funding facilitators, lending sites run a credit check on each potential borrower and assign them a risk level. Depending on a person's risk level, he or she can receive an interest rate as low as 6.78 percent. Typically, loans are funded by numerous investors who pitch in amounts of $25 or more.
Due to the popularity of these lending sites, there are thousands of investors, allowing loans to be fully funded in as little as two or three days. Once a loan is funded, the loan amount is distributed by the peer-to-peer lending site, and the site also collects the monthly fixed-rate loan payments.
Peer-to-Peer Lending for Paying Off Credit Cards
Although peer-to-peer loans can be used for a variety of purposes, paying off credit cards and debt consolidation are the most popular borrower requests. People have grown sick and tired of paying astronomical credit card interest rates and are turning to P2P lending sites, such as Lending Club and Prosper, in growing numbers to receive low-interest personal loans in order to pay off their credit card debts.
These sites allow borrowers to advertise their funding needs to thousands of potential investors. However, paying off credit card debt is the leading reason why an overwhelming number of people use these helpful sites. In fact, over 60 percent of Prosper loans and 80 percent of Lending Club loans go towards paying off credit cards.
If you have high-interest credit card debt, you may be able to secure a personal loan with a 6 to 10 percent interest rate, allowing you to pay off your debt much sooner or save the difference. With peer-to-peer lending, you'll also be paying back fellow humans over a short three or five-year period, instead of continuing to make endless payments to a shameless and nameless company that could care less about your personal financial situation. According to Lending Club, nearly 80 percent of borrowers choose to use their funds for these purposes.
In the end, peer-to-peer lending is the best option for debt consolidation. It makes financial sense to consolidate high-interest debt for lower rates and bolster your credit score, instead of hurting it through the use of a debt consolidation company.
Making the Decision to Secure a Peer-to-Peer Loan
Almost all financial experts and past borrowers agree that peer-to-peer lending poses the least amount of risk to borrowers. With peer-to-peer lending, you know the exact terms of the loan, and if approved, you receive the money right away and are able to spend it however you like.
The risk really lies with the lenders, who take the chance of not getting paid back. With hundreds of thousands of investors now lending on these sites, it's safe to assume that the default rate is staggering low, meaning borrowers are happy with the loan terms and able to repay their loans.
Despite having limited risk, you should still do your due diligence by comparing lending sites, since each site has different loan terms, qualification requirements, and interest rates. For example, Prosper provides loans from $2,000 to $25,000 with one, three, or five-year repayment periods. Lending Club, on the other hand, allows people to borrow up to $35,000 and offers three or five-year repayment periods.
While peer-to-peer lenders have less stringent borrowing requirements than banks and other lending institutions, they are still selective about whom they choose to give money to. It helps to have a good credit score of 700 or above and a solid income-to-debt ratio.
The key to using peer-to-peer lending to finally get rid of your debt burden is to avoid using your credit cards and racking up balances again. It's wise to keep a card for emergencies, but avoid using it to make frivolous purchases. If you avoid using your credit cards again and regularly make your peer-to-peer loan payments, your debt burden can finally be lifted in no time at all.
Many people today, including the author, are in search of a reasonable solution to retiring high-interest credit card debt. Peer-to-peer loans are a viable solution to this problem. Readers interested in learning more about P2P lending and how it can help resolve the complicated issues surrounding credit card debt can read here about the benefits of Peer-to-Peer personal loans.
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