Should You Consolidate Debt with LendingClub or Prosper?

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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 chart showing the top uses of LendingClub loans:

Debt Consolidation with LendingClub or Prosper

Debt Consolidation Top Purpose for Loans


There are a number of ways to consolidate debt. In the past, for example, I’ve used 0% APR balance transfer 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 18 months.

In contrast, there are some distinct advantages with LendingClub and Prosper that make them both worth considering as you work to get out of debt:

  • 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 or 5 Year Term: With both social lending sites, the term of the loan is either three or five years. It seems to me that 3 years is an ideal length of time to pay off 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. And the 5 year option is available for those that need more time to climb out of debt.
  • No Pre-Payment Penalty: While the term of the loan is three to five 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.
  • 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 35%. 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 35%.
  • 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
  • 6 or fewer credit inquiries on your credit report in the last 6 months
  • At least 2 revolving credit accounts 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 get your credit score. Prosper also doesn’t have the same debt-to-income ratio requirements that you’ll find with LendingClub.

As you consider your best options for consolidating debt, here is a table summarizing LendingClub and Prosper:

Debt Consolidation with LendingClub and Prosper

 
Prosper
LendingClub
Maximum Loan Amount$35,000$35,000
Term of Loan3 or 5 Years3 or 5 Years
Minimum FICO Score640660
Interest RatesSet by ProsperSet by LendingClub
Pre-payment PenaltyNoneNone
FeesUp to 4.95%Up to 5.00%
Maximum # of Loans Allowed at Any One Time22
Official WebsiteProsperLendingClub
Published or Updated: August 18, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. jim says:

    I suppose it would depend on the interest rate of course. Lending Club advertises “Rates from 6.78% to 29.99%” So if you’ve got a great credit score then you can get a rate just under 7% for unsecured debt. Not bad for unsecured debt. A fixed rate personal loan at a local credit union starts at 8.5%.

  2. Jacob Lee says:

    If your credit card debt is out of control, you might consider consolidating. Credit card consolidation is taking out a loan, usually with better terms, to pay off several credit card debts. One way to consolidate is taking out a loan using P2P lending. P2P lending is peer-to-peer lending — when a person will lend another person money with an agreed-upon monthly payment and interest rate. The two most popular P2P lending sites are Prosper and Lending Club. Both sites offer unsecured loans up to $35,000 for a variety of purposes, including consolidating your credit cards. After obtaining a loan, you can set up automatic payments or manually pay each month. What’s the motivation to pay off your loan if it isn’t through a bank? Like traditional loans, non-payment or default on P2P loans is reported to the credit bureaus and can damage your credit score.

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