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Can You Get out of Debt with Peer to Peer Loans?

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Debt, especially high-interest debt from credit cards, might sometimes seem impossible to pay off. 

You can try getting out of high-interest debt by throwing as much money as possible at your bills, and that might eventually work, but it’ll cost a lot of time and money, and it might not be the best way to go about it.

Consider Peer-to-peer loans. This type of loan might be your best option to consolidate your debt into low-interest, fixed-term payments that’ll allow you to get out of debt faster and at a lower cost. You might even be eligible for a P2P loan with bad credit.

Remember though, that even if a peer-to-peer loan can help you consolidate your debt, you’re responsible for fixing the core issue that drew you into credit card debt in the first place.

What’s A Peer-To-Peer Loan?

Not everyone knows peer-to-peer loans exist. In fact, they’ve only been around for a bit over a decade, so don’t feel bad if it’s a new concept.

Also known as “social lending” or “crowdlending”, peer-to-peer loans have existed since 2005. Today, the market is filling up with different competitors that look to give you the best option possible. Websites like Prosper, Lending Club, Peerform, Upstart, StreetShares all compete with different features of their own.

According to the Consumer Financial Protection Bureau, peer-to-peer lending “uses online ‘platforms’ to connect consumers or businesses who seek to borrow money with investors willing to buy or invest in the loan. In most cases, once a loan is made, the platform collects principal and interest payments from borrowers and sends the payments, less certain fees that the platform keeps, to investors.”

These types of loans are unsecured, meaning you don’t have to provide any collateral to get them. What makes them attractive is that they give you a concrete payoff date and an option for a fixed — and potentially lower — interest rate.

Paying Off High-Interest Debt with a P2P Loan

When you apply for a P2P loan through an online platform, you won’t feel much different than if you were applying at a traditional bank. Most of these loan applications use a soft credit pull online to show you what you’re eligible for without damaging your credit score. This type of process allows you to check several options before picking one. 

What you do once you’re on the site is go to the application instructions, and answer several questions about things like your yearly income and how much you want to borrow. You’ll then be able to see what you’re approved to borrow and at what rate.

Once your application has been approved, you can get your funds in a matter of days.

Peer-to-Peer Lending vs. Bank Loans

The main difference between peer lending and traditional banks is that P2P loans are given by an individual or a group rather than funded directly by the lender. The platform handles all the application processes, the disbursement of the funds and the collection of payments. It gets the money from qualified investors that include these kinds of investments in their portfolio.

On the other hand, bank loans come from a credit union, bank or another financial institution and are usually called Personal Loans. These come directly from deposits at the bank.

Personal Loans and P2P loans are fairly similar, so knowing which one is better for you depends on your credit score and other factors. Peer-to-peer loans range from 7% to 39% APR, whereas bank loans range from 6% to 36% APR.

Things To Consider Before Choosing A Peer-To-Peer Loan

Peer-to-peer loans offer many advantages when consolidating debt though you’ll want to keep an eye out for personal loan scams. Here are a few things you should consider before deciding a legit P2P loan is right for you.

  • Find out if P2P loans are available in your state. 

For example,48 states are open for you to borrow from Lending Club; only Iowa and West Virginia forbid it. Forty-seven states allow you to borrow from Prosper with the exceptions being Iowa, Maine, and North Dakota.

  • Make sure you get a lower interest rate than you currently have.

Interest rates from peer-to-peer loans vary from 7% to 39% APR but are generally lower than credit card rates for bad credit borrowers. This will allow you to save money on interest with a debt consolidation loan but always double-check the rate on your peer loan and the rates on loans you’re paying off.

  • Consider student loan refinancing companies to pay off student loans.

Those companies might offer you a better deal when consolidating student loans.

  • Pay close attention to the fees of the loan.

Most P2P sites charge fees to both the investor and the borrower. Look for the platform’s fees to take that into account when you select the one that’s right for you.

  • Make sure you can afford the monthly payments.

Hopefully, a P2P loan will offer you lower payments and lower interest rates than what you’re currently paying. Make sure you have constructed a well-balanced budget that allows you to afford your payments while still affording your normal expenses.

P2P Debt Consolidation is Only the Beginning

When you go into the market for a P2P loan to consolidate your debt, make sure you also take other steps that allow you to reach that great financial future.

That means not only paying off debt but also budgeting your money to avoid those nasty credit-card surprises and eventually creating an investment plan to make your money work for you. 

Too much debt can be suffocating but with a little effort and help from this loan consolidation trick, you can be on your way to a brighter financial future. Make sure you check rates carefully and use the loan for paying off your other debt and you’ll be on your way.

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