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Home / Debt / Peer-To-Peer Lending: Your Debt Consolidation Answer?


Living in the debt spiral can be horrendous. The stress can hinder, even destroy your relationships and wreck your health. Realizing that you are in over your head can lead to a desperate search for a way out. Most ”get out of debt quick schemes” should come with a scam warning next to their search result on Google, so you need to take the time to educate yourself. There are many options available to you that do not include giving a third party hundreds of dollars for debt settlement or consolidation. One is to find a way to consolidate your debt yourself.

What Is Debt Consolidation?

Debt consolidation is simply combining your high interest lines of credit into a single loan and; therefore, just one payment. The goal is to find a lender who will offer you a longer term and/or lower interest rate than your current creditors do. Most people try to do this with credit card debt, but other debts could be lumped into a consolidation loan.

The problem that many people run into is their credit score has begun to drop and traditional lenders may be unwilling to offer them an unsecured loan. Some consumers have begun to look to peer-to-peer lending as a way to consolidate their debt after they have been turned away by traditional lenders.

What Is Peer-To-Peer Lending?

Peer-to-peer (P2P) lending is a fairly new financial concept. Without the internet it would probably not exist. Lenders and borrowers are brought together by broker sites such as Prosper and Lending Club. (As a side note, does not endorse the services of either site nor do we receive a cash incentive from them, but we have researched each to determine that they are reputable and not scams.) These sites connect private investors willing to lend money to other private individuals.

There are many advantages to this type of lending. First, borrowers do not face as many restrictions as far as credit score and credit history are concerned. Secondly, funds are generally available for use within a few business days. Thirdly, while the brokerage site will check your credit, it is a ”soft pull” and does not lower your credit score. Lastly, the interest rate is generally lower than what you are paying on revolving credit, i.e. credit cards. If you are trying to consolidate several installment loans, the interest may be higher, depending on the lender.

Benefits of P2P Lending

The two biggest benefits of P2P lending are better terms and a lower interest rate. A majority of the lenders willing to consider generous loan terms, meaning that you could lower your monthly payments. While a longer loan term will lower your payments, please keep in mind that it will increase the total amount of interest you will pay over the life of a loan. The second benefit is the potential interest rate that you will pay. Rates are fixed and are currently running from 6.89 percent up to 29.99 percent. Even if the loan does not come with a lower interest rate, a fixed rate may help to insulate you down the road. You will also have the opportunity to decline the loan if it does not fit your needs.

P2P Doesn’t Work For Everyone

Both Lending Club and Prosper have certain restrictions that exclude some potential borrowers. To start, some states do not allow P2P lending. Iowa, Maine, and North Dakota have not licensed Prosper. Lending Club is not licensed in Iowa, Maine, North Dakota, Idaho, or Nebraska.

Both sites have credit score restrictions to protect their lenders. Lending Club requires a score in excess of 659 and Prosper wants to see a score above 639.

Loans must range between $1,000 and $35,000. The loans will have a fee attached as well. This can range between 1 and 5 percent of the total amount of the loan. You will want to account for the fee when deciding if the loan makes sense for you.

Lastly, a P2P loan will only make sense if you are able to put your credit cards away. If you can not control the urge to swipe the plastic, you are only going to end up with more debt and payments that are well beyond your financial means. These loans may not involve large, traditional banks, but they will appear on your credit report if you do not repay as agreed and will be subject to collection and court action for wage garnishment.


About the author: Jerry Coffey


Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.


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