Can Peer-to-Peer Lending Help You Get Out of Debt?

By Dawn Allcot / December 22, 2015
Can Peer-to-Peer Lending Help You Get Out of Debt?

Peer-to-peer lending, like other options for people who feel they are drowning in credit card debt, looks like a viable solution. But will it help get you out of debt?

Let's explore how peer-to-peer lending works and then compare it to some other choices to pay off credit card debt.

How Peer-to-Peer Lending Works

Peer-to-peer lending, as its name implies, bypasses the banks, and permits people to loan money to other people. For the lenders (the investors) this is one way to invest any amount of money, beginning at $25, and earn an average of about 10% return. This is a good return in any economy; with interest rates down, it's especially appealing right now.

But What About Borrowers?

Prosper.com, one of the two largest and most well-known peer-to-peer lending sites (the other is LendingClub.com), advertises rates as low as 5.99% APR, with a maximum APR of 35.97%.

Realistically, do not expect to get a 7% interest rate for a debt consolidation or credit card re-financing loan.

I ran a few scenarios to get some ideas of actual interest rates. (This is safe to do because checking your loan rates doesn't require a “hard” credit pull. Prosper.com did ask me for my social security number as part of the pre-screening process. And they do not look at your credit report until you decide to list your loan on their marketplace.)

When I asked to borrow $20,000 on LendingClub for debt consolidation with a “good” credit score (between 660 and 720) and fairly high monthly salary, the lowest interest rate was 23.99% APR. This would mean monthly payments of more than $700 for the next three years.

Next, I changed my reason for a loan to “credit card refinancing,” listed an “excellent” credit score of 720+, and sought to borrow half as much money. The best rate? 21.73% APR, which would mean 36 monthly payments of $361.​

Note: You are not guaranteed to receive a loan even if you list it. Your loan will be listed for 14 days, and if investor funding covers at least 60% of what you need, the loan will be issued.​

Benefits of Peer-to-Peer Personal Loans

Peer-to-peer lending was created as an alternative to bank or credit card funding, presumably for people with poor credit, undocumented or unsteady income, or other reasons that banks may turn them down.

However, with thousands of borrowers each day looking to borrow money for any number of reasons, the likelihood of getting the 60% funding you need from private investors is not high.

Investors are more likely to look at small businesses, start-up companies or other borrowers than those needing help paying off debt. After all, if you've gotten in trouble with debt once, investors may not view you as a good risk.

TheLendingClub and Prosper both withdraw loan payments directly from your bank account. This can be a benefit -- or not. You're more likely to make payments on this installment loan than if you were to set a goal of paying, for instance, $300/month toward your credit cards.

Of course, getting a loan still hinges on getting approved. This article, from the perspective of a successful peer-to-peer investor, provides insight into how to get funding for a peer-to-peer loan. Some of the red flags for this lender include previous delinquencies and a loan rating less than "A," which indicates an excellent credit score and a number of other factors.

How to Get a Peer-to-Peer Loan

To improve your chances of receiving the funding necessary, I suggest following these tips:

  • Borrow the minimum amount you need, and definitely less than $10,000. (Interest rates drop when you borrow less, too.)
  • Take time to improve your credit with on-time payments on existing loans.
  • Keep credit inquiries to a minimum.
  • .Look over your credit reports and correct inaccuracies.
  • Check your credit score with all three credit bureaus.
  • The higher your score, the better your odds of getting funding.
  • Leverage social media to spread the word about your need for funding.
  • Make sure the story you share is personal and heartfelt

Even if you do everything right, there's a chance you won't get funded. But that may not be the worst thing in the world. Read on to find out other alternatives to peer-to-peer lending to help get you out of debt.

Alternatives to Peer-to-Peer Borrowing

If you're looking to use peer-to-peer loans to pay off your credit card debt, it's possible that you can find (or are already paying) interest rates lower than what these websites will offer you.

Not all of these alternatives will work for everyone. And you may not be able to raise sufficient funds through these methods to pay off all your high interest debt. But they are worth considering as an alternative.

Alternative #1: 0% APR Balance Transfer Credit Card

If have a good or excellent credit score, it is very likely that you can qualify for 0% intro APR credit cards. Finding a few of these and doing a balance transfer will help you pay off your debt faster and save thousands of dollars in interest. Note: balance transfers usually require a 3% fee upfront.

Of course, it will require discipline to make fixed monthly payments on your credit cards even as your minimum payment goes down each month. But paying off the principal without incurring any interest cost ranks as a big win!

If you are looking for a larger loan to consolidate your credit card debt, there may not be enough credit card credit available for you to refinance the debt with 0% APR cards.​ Still, if that is the route you want to take, you can find our recommendations for the best balance transfer credit cards by clicking here.

Alternative #2: Improve Your Credit Score

If you do not currently have good or excellent credit, and cannot qualify for a peer-to-peer loan, your best strategy is to continue making your minimum payments. Then, as your credit approves, apply for a 0% interest credit card to consolidate your debt.​​

Alternative 3#: Seek Professional Help

If you cannot make your monthly payments, speak to a credit counselor about negotiating with your creditors and finding a way to re-pay your debt slowly.

Check out this page on CreditForums for more information on professional credit consultations.

Want to Learn More?

If you are interested in learning more about peer-to-peer lenders Prosper and LendingClub, check out these links. It just may be that one of their peer-to-peer personal installments loans will help you get out of debt.

You can also learn more about personal loans on our personal loan page. You will find reviews and resources about a lot of peer-to-peer and other online lenders.

Or, if you are ready to get started, use the EVEN Financial common loan application below to see what kind of rates you can qualify for today.​