Should You Ever Use P2P Lending to Consolidate Debt?

Fees can make borrowing financially difficult, as well. According to NerdWallet, loan origination fees can also creep up into the 5 percent range, which could increase the loan amount a borrower needs to meet his debt obligations.

It requires a debt-reduction strategy. This isn’t a disadvantage of marketplace lending sites, but a drawback caused by borrowers. Your marketplace loan is still a loan, with interest and penalties attached; if you have no plan in place to repay the money, a marketplace loan won’t serve any purpose but to transfer your financial problems to another medium.

Potential borrowers should remember that their credit scores are critical to being approved. Most lending sites expect above-average FICO scores of 640 to about 700, and a debt-to-income ratio no higher than 25 percent.

Your credit card debt should be the only black mark to your credit history to maximize your chances of being eligible. You might be disqualified if you’ve had any delinquencies, bankruptcies or a high number of credit inquiries in the last seven years. If you default on your loan, you’re still held legally liable as you would with a conventional loan.

Before considering a marketplace loan, you should work to improve your financial situation to position yourself to qualify for an attractive borrowing rate. Take the necessary steps to improve your credit and keep your desired loan amount as low as possible; that way, you will present yourself to investors as a creditworthy and trustworthy borrower.

For investors, keep in mind that you might lose part of your investment if your borrower defaults on the loan. Prosper, which is a top-rated marketplace lending site, has a 6.62 percent default rate, for instance. On LendingClub, that stat is 5.13 percent.

And above all else, borrowers and investors should be completely honest and forthright with each other regarding the terms of the loan. Neither side should withhold important financial details; most marketplace lending sites enable both parties to ask and answer questions during the entire lending process.

By putting the “social” in social lending, marketplace lending sites allow borrowers and lenders to come together and create mutually beneficial debt management and investment strategies.

Compare Marketplace Lenders on Credio