When you find that you’re struggling to rid yourself of high-interest debt, it is always a wise financial move to consolidate that debt and make progress. Debt consolidation means you’ll make a single payment, instead of several payments, and save on interest.
Some borrowers use credit cards, home equity lines of credit (HELOC) and personal bank loans to consolidate debt. But, an increasingly popular alternative of debt consolidation is peer-to-peer (P2P) lending.
Two of the largest and most popular P2P lending platforms are Lending Club and Prosper. As of June 2013, they originated a total $1.9 billion and $525 million in P2P loans, respectively.
P2P loans are unsecured loans funded by regular people, who finance your loans in exchange for a majority of the interest that collected every month. (Both investors and borrowers remain anonymous.)
Usually, borrowers opt to use P2P loans because they have no other options left, P2P loans have lower interest rates or they prefer that their interest payments go to personal investors as opposed to major financial institutions and lenders.
A P2P loan is the same as any other line of credit. You must make a payment every month. The loan is recorded on your credit report and any late payments and/or delinquencies will appear if you do not repay the P2P loan. P2P loan borrowers must provide personal information and financial information. Loan terms tend to be 3 years and 5 years. Those with better credit profiles will receive lower interest rates.
While it may be easier to receive funding through P2P lending, it doesn’t mean that anyone can qualify for P2P loans. Companies like Lending Club and Prosper have strict minimum requirements for its potential borrowers. Then, you have to face the evaluation of potential investors.
So, in preparation of applying for a P2P loan, you should take steps to improve your credit profile and increase the attractiveness of your loan.