Should you consolidate your debt with LendingClub or Prosper?
LendingClub recently launched a new section of its website that lists statistics on borrowers and lenders. One data point that caught my attention is that approximately 50% of all LendingClub loans are for debt consolidation. In fact, at one point, almost 60% of all borrowers said they intended to use the loan to consolidate their debts, but that number has come down a bit.
Here is a graph showing the main uses of LendingClub loans:
There are several ways to consolidate debt. In the past, for example, I have used 0% APR balance transfer offers to reduce interest payments as I pay my bills. The only downside to balance transfers is that the longer offers only last 21 months.
Read more: Prosperity Review
Benefits of debt consolidation with LendingClub or Prosper
There are distinct advantages with LendingClub and Prosper that make them both worth considering when working to get out of debt:
- Fixed interest rate: A fixed interest rate is probably one of the most compelling advantages that LendingClub and Prosper to offer. There is hardly any credit card today that offers fixed interest rates. And I’ve heard horror stories of how some people have seen credit card rates soar. With LendingClub and Prosper, the rate you get is the rate you keep.
- 3 or 5 year term: With the two social loan sites, the loan term is three or five years. It seems to me that 3 years is an ideal time to pay off a debt consolidation loan. It’s long enough that the payments are reasonable, but not long enough that you end up paying a fortune in interest payments. And the 5-year option is available for those who need more time to get out of debt.
- No penalty for prepayment: Although the loan term is three to five years, you can still prepay it if you want. There is no prepayment charge.
- Easy application process: The application process on Prosper and LendingClub is fairly straightforward. LendingClub’s online application, for example, takes less than 3 minutes to complete and a decision on your loan is made instantly.
- Automatic payment process: Once you have a loan, the monthly payments are automatically taken from your checking account.
- Confidentiality: Although LendingClub and Prosper are social lending sites, your privacy is protected.
- Loans are unsecured: Unlike a home equity line of credit, a LendingClub or Prosper loan is not secured by your home. You are of course obligated to repay the loan, but it is not secured by any of your assets.
Eligibility of borrower
When you consider LendingClub and Prosper, it is important to recognize that they have different requirements that borrowers must meet to be eligible for a loan. Here is a brief summary of the LendingClub requirements that you must meet to qualify as a borrower:
- U.S. citizen or permanent resident
- At least 18 years old with a valid bank account and a valid social security number
- A FICO score of at least 600
- A debt to income ratio (excluding mortgage) of 40% or less. This means that the total of your monthly debt payments (eg, credit card, school loan, car loan) divided by your monthly income should not be more than 40%.
- At least 3 years of credit history, showing no outstanding defaults, no recent bankruptcy (7 years), no open tax lien, no write-off or non-medical collection account in the past 12 months
- 6 or less credit requests on your credit report in the last 6 months
- At least 2 revolving credit accounts currently open
To qualify with Prosper, you must have a FICO score of 640. If you don’t know your credit score, you can click here to get your credit score. Prosper also doesn’t have the same debt-to-income ratio requirements that you’ll find with LendingClub.
Your credit score and debt consolidation
Credit scores play a major role in determining both your loan eligibility and the interest rate and fees you pay in the process. Scan the Lending Club rate table in the screenshot below for a few moments.
In the first column we see “Loan Grade”. This is the rating that Lending Club assigns to your loan. It is based on a number of factors, of which your credit score is a major component. Your grade can range from “A” to “G”. As you will notice in the “Interest rate” column, the rates can range from a very reasonable rate of 5.32% for a Category “A” loan up to 32.99% for a 36 month loan. with a “G” grade. .
Moral of the story: With P2P loans, your credit score REALLY matters!
How to register
Applying for a debt consolidation loan is simple. With LendingClub and Prosper, you can check your interest rate without affecting your credit score. And with both services, you can check what rate you’re eligible for within minutes.
With Prosper, the process took me about 2 minutes to check the rate on a $ 10,000 debt consolidation loan. Here are my results:
Your rates may be different, of course, depending on your particular situation.
LendingClub was just as fast. After entering the same information as with Prosper, here are the rates offered by LendingClub to consolidate my debt:
As with Prosper, your rates on LendingClub may be different from mine.
Loan terms are important
Loan terms on P2P lending platforms rarely extend beyond five years. As you can see from the rates above, the rates are higher for 5 year loans. The good news, however, is that since both loans are fairly short, the interest rate difference between the 36-month and 60-month loans will not be significant in the long run.
That said, if you can manage the payments on a 3 year loan, you will pay less interest.
As you consider your best options for consolidating your debt, here is a table summarizing LendingClub and Prosper:
|Maximum loan amount||$ 40,000||$ 40,000|
|term of the loan||3 or 5 years||3 or 5 years|
|Minimum FICO score||640||600|
|Interest rate||Ensemble by Prosper||Defined by LendingClub|
|Fresh||Up to 5.0%||Up to 6.00%|
|Maximum number of loans authorized at any time||2||2|
|Official site||Prosper||Loan Club|