Should You Consolidate Debt with LendingClub or Prosper?

Debt consolidation can reduce your interest rates and simplify your finances. Two online options to consolidate loans are LendingClub and Prosper. In this article we examine both.

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 21 months.

Advantages of Consolidating Debt with LendingClub or Prosper

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.

Check LendingClub Rates
Check Prosper Rates

Borrower Eligibility

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 600
  • A debt-to-income ratio (excluding mortgage) of 40% or lower. 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 no more than 40%.
  • 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

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 eligibility for a loan and the interest rate and fees you pay in the process. Scan the Lending Club rate chart on the screenshot below for a moment or two.

Lending Club Screenshot

In the first column we see “Loan Grade”. This is the grade that Lending Club assigns to your loan. It is based on a number factors, of which your credit score is a major component. Your grade can be anywhere from “A” to “G.” As you’ll notice from the “Interest Rate” column, rates can range from a very reasonable 5.32% for an “A” grade loan up to as much as a 32.99% rate for a 36-month loan with a “G” grade.

Moral of the story: With P2P loans, your credit score REALLY matters!

How to Apply

Applying for a debt consolidation loan is simple. With both LendingClub and Prosper, you can check your interest rate without affecting your credit score. And with both services you can check the rate you’d qualify for in a few minutes.

With Prosper, the process took me about 2 minutes to check the rate on a $10,000 debt consolidation loan. Here were my results:

Prosper Debt Consolidation Rates

Your rates may be different, of course, based on your specific circumstances.

Check Prosper Rates
LendingClub was just as a fast. After entering the same information as I did with Prosper, here were the rates LendingClub offered to consolidate my debt:

LendingClub Debt Consolidate Rates

As with Prosper, your rates on LendingClub may be different than mine.

Check LendingClub Rates

Loan Terms Matter

Loan terms on P2P lending platforms rarely extend beyond five years. As you can see from the rates above, rates are higher for 5-year loans. The good news, however, is that since both loans are fairly short in duration, the difference in interest rates between the 36-month and the 60-month loans will not be substantial over the long run.

That said, if you can handle the payments on a 3-year loan, you’ll pay less interest.

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

Prosper
LendingClub
Maximum Loan Amount $35,000 $40,000
Term of Loan 3 or 5 Years 3 or 5 Years
Minimum FICO Score 640 600
Interest Rates Set by Prosper Set by LendingClub
Pre-payment Penalty None None
Fees Up to 4.95% Up to 6.00%
Maximum # of Loans Allowed at Any One Time 2 2
Official Website Prosper LendingClub

Topics: Credit

4 Responses to “Should You Consolidate Debt with LendingClub or Prosper?”

  1. 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

    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.

  3. Tal Wilk

    Hi Rob,
    I opened an account with Prosper, and LendingClub as you brought up the idea of direct lending in one of your podcast. I was wondering if other subscribers opened an account with these direct lenders, and how does it go for them so far? I noticed you only invested $1000 with them. I was wondering if investors feel it is a safe enough to invest a large amount of money with direct lenders (the return is more than 4%, which is normally the magic number for retirement payback calculation. As anyone use Upstart for direct investment? If yes, what kind of feedback do they have?
    Thanks,
    TW

  4. Thanks for the info, Rob. I saw similar data today looking at the two websites. Thanks for the info on fees charged and the minimum FICO scores required to apply. I will pass this info along to someone who had mentioned getting a consolidation loan from Lending Club.

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