Peer to Peer Loans as Debt Consolidation

Debt consolidation is a common practice for people suffering from high amounts of credit card debt. It allows individuals to pool their debt, make a single payment, and receive a lower interest rate. Common forms of debt consolidation include second mortgages and moving debt to one credit card. There is an emerging option that individuals are finding really attractive, peer to peer lending.

Peer to peer lending is a form of microfinance or small personal loan. The loan is not from a bank, but from individual lenders. It is truly person to person lending. The loan is facilitated by a bank which is responsible for several aspects of the lending process. These include: credit checks of borrowers, connection of borrowers and lenders, filing of notes or loan agreements, and handling of payment. Each bank that facilitates peer to peer lending is non traditional bank that is primarily based on the internet. Peer to peer loans amounts vary, but often have a max of $25,000. This makes them ideal of debt consolidation for several reasons.

There is less hassle of dealing with a major bank. Personal loans are not a common thing for most banks and people can often be denied based on several different factors. This leaves the individuals to seek another bank for a loan. The process starts over again and has the possibility to take several tries before getting a loan. The overall process is time consuming with each try having to fill out the necessary forms and waiting on approval. Peer to peer lending, after approved as a borrower, you can immediately post you loan. Lenders find you and it has the effect of submitting your loan request to thousands of banks.

A better interest rate is often possible with peer to peer lending. People who use credit cards to consolidate credit card could initially receive a low interest rate. This is subject to change and missing a single payment to any form of credit not just this credit card could raise the interest rate. Furthermore, low initial rates are only there for a short period of time. Individuals trying to pay off a large sum will need more time and the low rate will expire. Historically, interest rate on credit cards is between 10% to 20%, and could be as high as 30%. At this rate of interest paying off any debt is extremely tough. Peer to peer loans can be as low as 6% and go to a high of 19%. This is dependent of the borrower’s credit history. Another point is the interest rate is not subject to change. The interest rate received on a peer to peer loan is set over the life of the loan.

This is a reduction in risk compared to a second mortgage. A second mortgage is a popular form of debt consolidation. When an individual does this, the house is a piece of collateral used to back the loan. If there is default for any reason, foreclosure is possible. Peer to peer loans are a unsecured loan that is backed with no collateral. This makes the interest rate possibly higher, but individuals are not exposing there home to any risk of foreclosure.

It actually pays off the debt. The term of a peer to peer loan is often three years. At the end of the three years, just by paying the monthly payment, individuals will have no debt left on the loan. The minimum payment per month includes part of the principle and interest. Conversely, with credit cards, the monthly payment often has the effect of keeping individuals in debt longer. It is not large enough of amount to make it an effective way to pay down the debt. This leaves individuals with the choice to either pay the minimum or pay additional each month. Only the individuals that make a conscience effort to pay more will get the benefits of this type of debt consolidation. Peer to peer loans the payment is the same each month and at the end there is nothing left, which is a tangible reward for many borrowers.

Most people that are finding peer to peer lending are individuals seeking a solution to credit card debt. The benefit of a lower interest rate is alone an attractive reason to seek a peer to peer loan. The underlying reasons like reduced exposure compare with using a second mortgage is a comforting factor of peer to peer loans. Furthermore, after the loan comes to term, individuals will have no debt which gives them something to look forward to. These factors have sparked the growth of peer to peer loans and will continue to fuel it into the future.