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Why A Peer-To-Peer Debt Consolidation Loan Might Be Your Best Path To Debt Management

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.

5 Tips For Getting Your Debts Under Control

This may come under the category of “pretty darn obvious” but the best debt management tip of all is to not get into debt in the first place. Debt can have a horrible impact on both your finances and your health. The stress generated by having to cope with debt can cause heart disease, indigestion, fiber myalgia, high blood pressure, arthritis, a spastic colon or migraines. If want to avoid this and get your debts under control here are 5 tips that can help

#1. Figure out how much you owe

This may also seem obvious but the best first step is to sit down and figure out exactly how much you owe and to whom. Don’t be one of those “see no evil” monkeys. You can’t hide from your debts so there’s no point in trying to ignore them. List your debts with the amount you owe, the name of the lender, the due date, the interest rate, the minimum monthly payment if appropriate and the last time you were able to make a payment. While the results of this exercise might scare you it’s absolutely necessary you do it.

#2. Determine your spending

The second best debt management tip is to sit down and figure out where your money goes. This could be as simple as drawing a vertical line down the middle of the page and then listing all your recurring expenses on the left side and your discretionary ones on the right. Your recurring expenses would include things such as your utilities, insurance premiums, rent or mortgage payment, auto loan payment, cell phone bill and the like. Your discretionary spending will consist of categories like food, clothing, entertainment, eating out, your cable bill (yes, that is a variable) and so forth.

Next, add up all your spending and compare it to your total monthly income. We’ll be shocked if don’t find you’re spending a lot more than you earn, as this is why you’re piling up debt.

#3. Budget your discretionary spending

Yes, here comes the B word. If you truly want to manage your debts you need to make a budget. This should be pretty easy. Since there is not much you can do about your recurring expenses all you need to budget is your discretionary spending. You already have a list of them so revisit that list and start making cuts. Some of the easiest places to make them are usually in entertainment, eating out, and clothing. If you really sharpen your pencil you might also be able to cut your food cost. The object of this exercise is to get your spending down to the point where you can start paying off your debts.

#4. Get some good help

The good news is that you don’t have to do this budgeting thing all by yourself. There are a number of free apps available that make budgeting practically painless. One of the most popular of these is Mint. It will track your spending for you, help you organize it into categories and even send you an alert via email if you overspend in any of them. Other popular budgeting tools include You Need A Budget (YNAB), GoodBudget and Mvelopes, which is a modern-day take on the old envelope method for budgeting.

#5. Create your plan

You can relax as you’ve done the hard work. All you need to do now is make a plan for paying off your debts. There are two ways to do this. First, there is the snowball method. This is where you go back and reorder your debts with the one that has the smallest balance at the top down to the one with the largest. You should find it easiest to pay off the one with the smallest balance so focus on it. When you’ve paid it off you will have extra money to begin paying off the one with the second smallest balance and so on. Of course, you will want to continue making at least the minimum payments on your other debts.

A second way to repay your debts is to reorder your list with the one that has the highest interest rate at the top down to the one with the lowest. Many experts feel this would be a better solution, as it would save you the most money – though it won’t get you out of debt as quickly as if you were to snowball them.

Regardless of which of these options you choose you need to commit to sticking to it. This will require some self-discipline but if you can do it you will ultimately be debt-free – and how good with that feel? Of course, while you’re sticking to that plan is crucial that you not take on any new debt. That will also require self-discipline but will be worth it when you’ve eliminated all your debts and now have money to spend on the fun things in life like a vacation in Hawaii, a cruise, a ski trip, that hobby you’ve always wanted to pursue or whatever it is that would make your life more enjoyable.