If you’re in debt and ready to get out of the red, you want to repay the money you owe as quickly as possible. You realized that the longer you carry balances, the more interest accrues on your debts — and the more money those loans and credit cards will eventually cost you.
Before you start frantically Googling “get out of debt quick,” take a deep breath and a step back. You need to educate yourself about your options before diving head-first into anything. Doing your research will help you determine the right solution for your unique situation.
A number of financial tools exist to help you get out of debt, including the option to consolidate your debt. This interests many people currently dealing with repayment, because consolidation can simplify your situation, provide you with a lower interest rate or lower monthly payment, and save you money over time.
But dealing with debt consolidation companies can be difficult. Even after identifying a reputable business, they may or may not work with you to consolidate your loans and balances. Again, it’s about your unique situation, and working with a company may not be the right answer for you.
Here’s the good news: debt consolidation companies aren’t your only options anymore. You can now use peer-to-peer lending to get out of debt if it makes sense for you.
What’s Peer-to-Peer Lending?
Peer-to-peer lending is a new financial product in the lending industry. These types of loans connect you with another individual, not an institution like a bank or credit union. Peer-to-peer lending companies, like Prosper and Lending Club, act as third parties to connect individual borrowers with individual lenders.
The advantage of peer-to-peer lending for borrowers? Less restrictions and barriers to securing the loan you need. While traditional banks may not grant you a loan to use to consolidate your debt, you’re more likely to be approved for that same loan from a peer-to-peer lender.
Once approved, you’ll also receive your funds within a few business days. This is much faster than the typical process at a big bank or other traditional lender.
(Another benefit: the application process for a peer-to-peer loan only results in a soft inquiry, which won’t affect your credit score.)
How Peer-to-Peer Lending Can Help You Get Out of Debt
Peer-to-peer lending can help you repay debt if you want to consolidate what you owe, but don’t want to (or can’t) deal with a debt consolidation company or a formal financial institution like a big bank. It’s a new option that may provide a better answer than traditional debt consolidation.
Why? One of the biggest benefits to getting a loan with Prosper or Lending Club is that the peer-to-peer loan often has better terms than a loan from a bank or credit union. That means a lower interest rate on the new loan — which is a critical factor in making debt consolidation work for your situation.
Consolidating your debt with a loan from Prosper or Lending Club can simplify your situation by allowing you to pay back one loan rather than several. It can also save you money if you can get a lower interest rate on the peer-to-peer loan than the interest rates on your current balances for loans (like student or car loans) and credit cards (which often have very high interest rates).
While peer-to-peer lending presents a new option for helping you get out of debt, the most important rule in personal finance still applies: there are no blanket solutions for financial problems. It’s important to make sure a peer-to-peer loan makes sense for your situation before applying.
Who Should Use a Peer-to-Peer Loan as a Debt Repayment Tool?
A peer-to-peer loan from Prosper or Lending Club will make the most sense as a debt consolidation tool for someone who:
Lives in a state where peer-to-peer lending is allowed: Unfortunately, peer-to-peer lending isn’t allowed in every state. Prosper is not allowed in Iowa, Maine, or North Dakota. Lending Club is not allowed in Iowa, Maine, North Dakota, Idaho, or Nebraska.
Has an okay (or better) credit score: While the application process for a peer-to-peer loan is simple, that doesn’t mean everyone automatically qualifies for the loan they want. You may have a hard time getting approved — or getting a low-interest rate loan — with a subprime credit score. At Prosper, that means anything below 640. At Lending Club, it’s 660.
Wants to borrow between $1,000 and $400,000: This is the range allowed for personal loans by peer-to-peer lenders.
Is approved for a loan with a better interest rate than their current debts: After applying and getting approval for a peer-to-peer loan, you’ll receive a few loan offers. Ensure that the one you select offers you a better interest rate than the rates on your current balances.
Peer-to-peer lending may make sense for someone who can get a $5,000 loan at a 10% interest rate to pay off two credit cards with balances of $2,500 each and interest rates over 20%. This option doesn’t make sense if you need to repay student loans with interest rates of 6%.
Will save enough money to cover fees: You need to ensure your peer-to-peer loan will not only allow you to pay off your debt at a lower interest rate, but also leave you with enough wiggle room to pay for closing costs — anywhere from 1% to 5% of the total amount of the loan.
Is prepared to repay the loan (and stop using the credit card): A peer-to-peer loan won’t help you if you don’t use it to immediately repay your higher-interest rate debts and establish a plan to then repay the loan itself. It also won’t help if you continue adding to the balance on your credit cards.
Taking out the loan doesn’t mean you’re out of debt. You’re not in the clear until you repay your debts and repay the peer-to-peer loan. Make a plan before borrowing!
Understands peer-to-peer loans are still legally binding: Even though big banks aren’t involved, there are still consequences to defaulting on a peer-to-peer loan. Understand that, and again: have a repayment plan to avoid failing to pay off this loan.
Won’t take out more than actually needed: The right candidate for this type of debt consolidation tool won’t borrow more than necessary. This only adds to your debt load and doesn’t help solve your current financial problem.
If you’ve done your research and feel using peer-to-peer lending is right for you to help you get out of debt, head over to Prosper or Lending Club or use ReadyForZero’s tool to apply for a loan to consolidate your debt.
NOTE: Some links in this article have referral codes that allow us to get paid a small referral fee when we send new users to a partner site. With that said, we never recommend any product or service unless we think it is trustworthy and has the potential to help our readers.
Image Credit: Clement L