Consolidating credit card debt is sometimes the best route to take when you have too many debts that are difficult or impossible to manage. The benefit of credit card debt consolidation is combining your credit card debts into one, so that you only have one payment to make each month. If you do it right, debt consolidation has better terms and a lower interest rate as well. In some cases, the amount of debt you owe can even be reduced through a credit card debt consolidation.
You can consolidate debt through a loan or on a credit card. But what about P2P loans? Are they good for consolidating credit card debt just like traditional loans? A P2P loan, standing for peer-to-peer loan, is a loan between an investor or an everyday person and the borrower. It is not a loan that you take out from a bank. Similar to regular loans, you negotiate a monthly payment and interest rate with the individual lender.
It’s Just as Important to Make Your Monthly Payments on Time
P2P loans report to the credit bureaus, so just as with a regular loan, you should make your payments on time each month. Some investors on P2P platforms only lend in small amounts, such as $25 to $50, so you’ll have to search for someone who is willing to lend the amount of money you need.
Investors on P2P Platforms Favor Those with Good Credit Scores
Due to the risk of borrowers defaulting on a loan, investors naturally prefer lending to people with good credit scores. Some P2P lending platforms only accept borrowers with a certain credit score. Lending Club, for example, requires borrowers to have a credit score of at least 600. Two other factors considered before approving someone for a P2P loan are income stability and the amount of debt they have.
States That Don’t Permit P2P Lending or Borrowing
Some states don’t allow their residents to borrow or lend money on peer-to-peer lending platforms. Therefore, if you live in a state where it’s illegal, you won’t be able to take out a P2P loan for debt consolidation. At the time of this writing, states that don’t allow P2P lending include Pennsylvania, West Virginia, Iowa, North Dakota, and Maine.
3 Signs a Credit Card Debt Consolidation is a Good Idea via a P2P Loan
Consolidating your credit card debt through a P2P loan is a good idea if: (1) It is cheaper than credit cards (2) You have a debt payoff plan. (3) You are a decent candidate for a loan. If you can consolidate your debt at a lower interest rate on a credit card, then that’s probably a better option for you. If a peer-to-peer loan has a lower interest rate than credit cards you qualify for, then it’s a good idea.
Loans have a specific end date, making it critical to have a repayment plan whenever you take out a loan, whether it’s P2P or from a bank. The time-frame to pay back a loan in peer-to-peer lending is usually 2-3 years. Always create a debt repay off plan before applying for a P2P loan to ensure it’s feasible for you.
It will be hard for you to obtain a P2P loan if you have a combination of low income, high debt, and a low credit score. The most desirable loan candidate is someone with steady income, manageable debt, and a good credit score. Remember, there is competition for borrowing on P2P platforms. Credit card APRs are usually lower than P2P loans for those who have a low credit score, so you wouldn’t want a P2P loan in that case.
Don’t Forget the P2P Platform’s Borrowing Fee
Lastly, you must factor in the fees of the P2P platform before deciding whether or not a P2P loan is worth it. Each peer-to-peer lending platform has different fees, so you’ll have to check that particular company’s rates. P2P borrowing fees typically range from 1%-6%. If the borrowing fees cause you to pay more overall than continuing to pay off your credit card as is, then it’s not worth consolidating through a P2P loan.
P2P loans are a good idea for consolidating credit card debt as long as they are cheaper than your alternatives. Everyone’s situation is different, so for some people, a P2P loan would actually be a bad idea. Compare prices to determine whether or not a P2P loan is actually cheaper than your other options, and always create a debt repayment plan before committing. You need to make sure your monthly payment isn’t too much to handle.