If you’re reading this article it’s likely that your debts have gotten out of control. You may actually be several months behind on some of your bills. You may be receiving calls from angry lenders or even worse, you may be getting multiple calls every day from a debt collector.
The quickest – debt consolidation
There are several ways to get debts under control. For instance, you could go to consumer credit counseling or you might be able to do a balance transfer. But in most cases the best path to debt management is with a debt consolidation loan. If you have relatively good credit you might be able to get a personal loan from your bank or credit union. But if you’re having a serious problem with debt you probably don’t have very good credit, which would prevent you from getting one of these loans.
If you own your home and have some equity it’s possible you could get a home equity loan or a homeowner equity line of credit (HELOC). If you don’t own your home or don’t have much equity and have already been turned down for a bank loan there is another, new type of debt consolidation loan that could help. It’s called a peer-to-peer loan.
Why is this called a peer-to-peer loan?
This is because initially these loans came directly from another individual or group of individuals – or peers. However, the majority of these loans are now funded by investment funds and other such financial entities. However, the major advantage of peer-to-peer lenders remains the same, which is that they eliminate the middleman – the bank or credit union. This allows them to often offer loans at better interest rates due to their lower overhead.
How the loan process works on the peer-to peer lending sites
The different peer-to-peer sites have somewhat different loan processes but there are some elements they have in common. For example, you will first be required to submit a simple application that typically will include your name, Social Security number, the amount of money you want and how you’ll use it. If you pass this pre-qualification you’ll then be required to provide additional information such as your address and information about your checking account and. Following this the lending site will verify your income and other information and your loan request will be then placed on the site’s platform for investors to evaluate. In some cases there will be a kind of auction where lenders bid to fund your loan so that you might get multiple offers. In other cases, your loan will be either funded or not funded with no auction involved.
You could get a very fast answer
Another advantage of a peer-to-peer loan is that once your loan is on the site’s platform you may get an answer in three days or less. However, in the event you select a site that operates on the auction principle it could be as many as 14 days before you learn whether your loan has been funded.
This can make sense if you have poor credit
If you have less than sterling credit a peer-to-peer loan might be your best option for debt consolidation because lenders are sometimes willing to take more of a chance on people with risky credit histories then a bank or credit union.
The terms and interest rates
Peer-to-peer loans are like personal loans from a bank or credit union because they have terms of either three or five years – depending on how much you’re borrowing. The interest rate charged by these lenders typically range from 6% to 35.9% depending mostly on your credit score. Of course, the lower is your credit score the higher your interest rate will be. Once you see the loan’s terms and interest rate but don’t like the offer you can choose to decline it and try another site.
No hidden fees
All of the peer-to-peer lending sites charge fees for new loans. However, these are not hidden so you’ll know what yours will be upfront. As an example of these fees the Lending Club’s charges 1.11% to 5% of the total loan amount while Prosper charges 1% to 5%, again depending on the size of the loan.
The two major sites
The two biggest peer-to-peer lenders are the Lending Club and Prosper Marketplace. In fact, the Lending Club got so big it was able to go public last year. It currently has over $9 billion in loans and what many experts consider to be the best website in the industry. Prosper actually created peer-to-peer lending and now has $3 billion in loans. The major difference between these two lenders is that the Lending Club makes loans up to $35,000 while Prosper caps its loans at $13,000. What makes them similar is that they are the only two sites (as of this writing) where you could still get loans from individuals.
Not available everywhere
One of the biggest downsides of peer-to-peer loans is that they are not available everywhere. This is due to the fact that every state has its own regulations regarding investments and securities. As an example of this, the Lending Club is unable to offer loans in Iowa, Idaho, Maine, North Dakota, and Nebraska and Prosper is barred from making loans in Iowa, Maine and North Dakota.