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Should You Ever Use P2P Lending to Consolidate Debt?

 Edited by Janeane Davis to add:  When engaging in P2P loans, whether as the borrower or lender, take care to look at the return on the investment and the terms of the deal. P2P loans are real loans and should not be taken unless you are willing and able to make the payments that will be required in a timely manner.

Posted  by Paul Sisolak


The process of climbing out of debt often pits borrowers against their banks. Between double-digit penalty interest rates, debt forgiveness programs, or filing for bankruptcy in extreme cases, none of the common alternatives are particularly friendly to your finances, credit score or well-being.

Already a $7 billion market at large, the recent trend of peer-to-peer lending—also known as marketplace lending, or social lending— is gaining popularity as a no-frills avenue for consolidating credit card debt.

How Marketplace Lending Works

Popular marketplace lending sites, like Prosper, Lending Tree, Upstart and Payoff, all share the same goal: matching borrowers with investors. In this marketplace, a borrower (namely, a person who owes money on his credit cards) enters the amount he’s looking to borrow, and what the money will be used for.

In turn, an interested investor can invest in the request while earning a percentage of the repaid money. For investors, marketplace lending allows for higher returns than many other investments, like deposit accounts.

According to Fox Business, marketplace lending is a popular means of consolidating debt for many. More than 75 percent of Lending Club borrowers and 50 percent of Prosper borrowers use the sites to pay off debt—much of which is for credit card debt. These companies are gaining the attention of investors to fund them, as well.

Benefits of Marketplace Lending

People with credit card debt might find several advantages with marketplace lending:

It’s more transparent than a bank. Generally speaking, borrowers might have an easier time finding a loan through the marketplace, since standards are more flexible than a bank. Like a bank, marketplace lending sites are audited for accountability. Plus, there’s no middleman to be found, eliminating most of the opaque roadblocks a person in debt might encounter on the traditional route—like being offered another credit card to pay off your existing credit card debt.

Terms and conditions are more amenable. The Huffington Post notes that rates may start as low as 6 percent, and loan amounts can range from as low as $5,000 to as high as $35,000. Standard payback terms are an average of three years to five years.

Investors win out, too. Not only are they putting their faith in borrowers, prompting them to reduce their debts, investors can earn interest on their investments, higher than what they might find in a comparably termed certificate of deposit or other accounts. According to Mint.com, investors can earn an average of 9.64 percent on the marketplace loans they invest in.

Social Lending Cons

But P2P lending isn’t for everyone:

Rates can make it counterintuitive. Despite the attractiveness of low-interest rates with marketplace lenders, they can still run into the mid-20 percent range.

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