LendingClub recently launched a new section of its website that lists statistics about borrowers and lenders. One data point that caught my eye is that about 50% of all LendingClub loans are for debt consolidation. Actually, at one point nearly 60% of all borrowers reported that they intended to use the loan to consolidate debt, but that number has come down a bit. Here’s a pie chart showing the top uses of LendingClub loans:
There are a number of ways to consolidate debt. In the past, for example, I’ve used 0% APR balance transfer 12-month offers to lower interest payments as I pay down my bills. The one downside to balance transfers is that the longest offers last for just 12 months. In fact, I have a 12 month Citi 0% balance transfer deal that is expiring this month.
- Fixed Interest Rate: A fixed rate of interest is probably one of the most compelling advantages that LendingClub and Prosper offer. There are virtually no credit cards out there today that offer fixed interest rates. And I’ve heard horror stories about how some folks have seen the credit card rates go through the roof. With both LendingClub and Prosper, the rate you get is the rate you keep.
- 3 Year Term: With both social lending sites, the term of the loan is three years. It seems to me that 3 years is an ideal length of time to pay of a debt consolidation loan. It’s long enough so that the payments are reasonable, but not so long that you end up paying a fortune in interest payments.
- No Pre-Payment Penalty: While the term of the loan is three years, you can always pay it off early if you want. There are no pre-payment fees.
- Easy Application Process: The application process on both Prosper and LendingClub is fairly easy. LendingClub’s online application, for example, takes less than 3 minutes to complete and a decision on your loan occurs instantly.
- Automatic Payment Process: Once you have a loan, monthly payments are automatically deducted from your checking account.
- Confidentiality: Although LendingClub and Prosper are social lending sites, your confidentiality is protected. If you’ve spent any time on Prosper, you’ve probably noticed that some borrowers include their picture in the loan listing. This decision is totally up to you, and many borrowers do not include their pictures. Actually, some include pictures of their pets!
- 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.
As you consider LendingClub and Prosper, it is important to recognize that they have different requirements that borrowers must meet to qualify for a loan. Here’s a quick summary of the LendingClub requirements you must meet to qualify as a borrower:
- US 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 660
- A debt-to-income ratio (excluding mortgage) below 25%. This means that the total of you monthly debt payments (e.g., credit card, school loan, car payments) divided by your monthly income must be less than 25%.
- At least 3 years of credit history, showing no current delinquencies, recent bankruptcies (7 years), open tax liens, charge-offs or non-medical collections account in the past 12 months
- No more than 10 inquiries on your credit report in the last 6 months
- A revolving credit utilization of less than 100%
- More than 3 accounts in your credit report, of which more than 2 are currently open
Prosper’s requirements are not quite as stringent. 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 how to get your credit score for free. Prosper also doesn’t have the same debt-to-income ratio requirements that you’ll find with LendingClub.
There is one very important difference between Prosper and LendingClub that needs to be considered. The difference has to do with how interest rates are set. With LendingClub, they set your rate based on a number of factors including credit history, credit score, debit-to-income ratio, number of inquires to your credit, and loan amount. Once the rate is set, lenders bid to fund your loan. In contrast, interest rates with Prosper are set by the bidders. If bidders like your loan listing, they can actually bid down your interest rate (it can never go above the rate you set). Think of Prosper as the eBay of social lending where interest rates are set in an auction like fashion.
As you consider your best options for consolidating debt, here is a table summarizing LendingClub and Prosper:
Debt Consolidation with LendingClub and Prosper
|Maximum Loan Amount||$25,000||$35,000|
|Term of Loan||3 Years||3 Years|
|Minimum FICO Score||640||640|
|Interest Rates||Set by bidding process||Set by LendingClub|
|Fees||0.50% to 3.00%||1.25% to 3.75%|
|Maximum # of Loans Allowed at Any One Time||2||2|