I love p2p lending as an investment. I’m pretty sure you know that if you are reading this.
When I talk to people out there in real life like friends and neighbors, as well as my online friends, many of the questions I get are about borrowing. It’s understandable why. The average household has $134,643 in debt based on a detailed 2016 study by Nerdwallet. This includes all debt including mortgages. The debt is split up into 4 major categories of auto, mortgage, credit card and student loans, as shown on this excellent chart.
Debt is a serious drug and we Americans are addicted. What hurts so much about carrying so much debt is the need for consistent growing income to pay it off. The margin for error is razor thin for many Americans.
The average credit card balance per household today is just over $16,000 and the average student loan balance per household that has student loans is almost $50,000.
If you can avoid huge borrowings, then I say avoid it. You’ll be happier and less stressed. I’ve experienced this personally in my own life. But for most of us, that ship has already sailed and we have already bought that car or house or borrowed to get that college or grad degree so the question is how do we keep our debt levels and payments as low as possible?
Check Your Credit
When it comes to your credit, we have numerous credit scores, however, the standard for all credit scoring is FICO, which was developed by Fair Isaac. There’s only one place where you can get this score and it’s at MyFICO. You can get a one-time score there on their 1B program for $19.95 for any one of the 3 major credit bureaus or all 3 for $59.85.
The biggest benefit of paying for this score is that this is the exact credit score and the credit report that your bank, auto lender, credit card company or student lender is going to use to determine what kind of credit risk you are. MyFICO has great tools including a simulator where you enter in numbers like paying more on your credit cards or paying your car note off early and you can see how that impacts your score. These are great if you want to learn more about your credit. You also can look up just one of the credit bureaus yourself like TransUnion.
You want to look at your own credit to see where you are, what kind of loan you might get approved for and whether it looks like you are a low risk who will pay a low-interest rate or a higher risk paying a higher rate.
Be proactive. Make calls and write letters to your creditors. Many will work with you if you have an issue. Sadly, some won't but many will.
Now that you have checked your credit and think you can get a loan, what’s next?
The Big 3 in P2P Lending
How would I borrow on a p2p platform in 2017? If I was in one of these below categories I would definitely be looking at how p2p lending could help me save money, interest and lower my payments.
The overwhelming percentage of peer to peer loans or loans on the online marketplace come in one of 3 categories so we are going to discuss them in more detail. Two of these categories are so obvious they are a loan category or a focus area of certain lending platforms. The third one is a little less obvious but is a big hidden area that utilizes p2p lending.
What’s going on in this market should be a great concern to everyone. The new grads are saddled with tons of debt (and sometimes along with their parents too) and many have the equivalent debt of a home mortgage WITHOUT having the home that goes with it.
Bundle this with mostly younger millennial borrowers with limited credit history and financing or refinancing gets even tougher. One of the best established p2p lending markets is in the refinance or consolidation of student loans.
Every program is different and federal loans may have certain additional protections that private loans don’t. Be sure you understand these differences if you decide to refinance or consolidate. Understand when co-signers get released or when a fixed rate becomes variable. Your agreements from the platforms I recommend should clearly state these things for you.
LendKey is the best of online and offline lending for the student loan market. There is the understanding of the market, fast approval, easy funding and quick online application of the online marketplace, yet they work with credit unions all over the country to fund your loan at very low rates. You get matched with a local credit union where like conventional offline lending, there is a physical place you can go to talk to someone or ask questions. Rates are terrific and they do not have very strict credit requirements; 660 FICO and a minimum income of $24,000 are generally the minimum requirements for approval.
Commonbond is a great online lending platform in this market as well. If you have good credit and you are currently working, then this is probably the lowest refinance rate you will get. What I like most about Commonbond is something not even related to how they loan. Their rates are great and they have flexible loan options, which I’m a big fan of myself.
But what I really like is their social mission.
While giving great rates, they have what they call their Social Promise. The promise is that for every loan funded they fund the cost of educating one child in Africa. The students they currently fund go to a school in Ghana. I LOVE THIS. Consolidate loans, save money and help a kid get his education too? Sign me up and if you click the link and sign up I get a small fee at no extra charge to you.
Do you have at least $10,000 in outstanding student loans? Check your rate with LendKey or Commonbond right now. You could be saving some serious money and it does not hurt your credit score as it is not a 'hard' credit inquiry.
Credit Card Debt Consolidation
Easily the most common reason for using p2p lending is to consolidate high rate credit card debt into a lower rate term loan. Why pay 18% to your credit card company if your credit score and pay history is good enough to pay 7.5% for a 3-year term loan instead?
To get maximum benefit, you need to do one VERY important thing. DO NOT run up more credit card balances after you convert your credit card debt into a term loan with a platform like Lending Club , Prosper, or Upstart.
If you convert your balances to a p2p term loan and then start running up balances again, then 2 things will happen: your score will go down and you will have more debt to pay off over time. Don’t do this.
For friends with a spending problem, I gave them a special piece of advice I recommended years ago on Creditcards.com. Don’t close your credit card but take that card, put it in a freezer container which you then fill with water and just shove it in your freezer.
This creates the best of all outcomes.
Your credit score does not go down because you closed your account. Yes, closing accounts lowers your score. You don’t get rid of the card and it is there if you need it, but, and this is an important but, it is not immediately accessible. If you are worried about your spending habits, try this little trick. It will help you.
Do you have at least $5,000 in credit card debt that you think you are paying too much interest on? Then check out Lending Club, Prosper or Upstart today.
There are not any lending platforms I’m aware of that cater exclusively to those getting divorced. That’s probably a good thing. Making money off of a relationship ending doesn’t sound like a great way to do business, divorce lawyers notwithstanding.
Divorce is a much more common reason for using p2p lending platforms than we might think.
During a contentious divorce, the first and most contentious thing, if applicable, is custody of the kids. Parents fight tooth and nail to get as much custody or visitation time with the kids as possible and who can blame them. The legal fees that come with this kind of fight are substantial and a peer lending platform could be a source of accessing funds for those fees now but to pay back over time after the divorce is final.
The second most contentious thing, and sometimes it’s the most contentious in a divorce, is the split of assets. If a couple stays together long enough or at least one is financially successful long enough then there are assets that need to be split up. Cash, Stocks and Mutual funds are easy to split up. Real Estate is more difficult to split up as it is not a liquid asset. Generally, one has to buy out the other or they have to put the house on the market to sell and split the proceeds. This is true with personal residences as well as investment properties. Then there are assets like commodities and precious metals. I wouldn’t want to try to split up a gold bar.
These more complex and illiquid assets usually mean a buyout and if one party doesn’t have the cash available then a peer loan is a great solution to facilitate the asset split that is required as part of the divorce decree.
I’m pretty sure at least some of the Debt Consolidation listings on Lending Club are really asset split situations and the debt consolidation is really an asset consolidation.
I hope you aren’t going through a divorce. It’s painful. But if a p2p divorce loan would help split the assets more easily so you can move on faster and with fewer legal fees, then you should check out Lending Club and Upstart as options to help you.
The market for p2p loans in 2017 is dominated by 2 categories: Student Loans and Personal loans. These markets and the hidden divorce market make up not just the bulk of where most p2p loan requests come from but also where marketplace lending provides the best results. If I had to borrow for one of these reasons or for credit card consolidation, then I would certainly look at peer to peer lending platforms as a way to save money, lower payments and reduce interest costs over time.
Disclaimer: There are affiliate links with some of the platforms mentioned. This means if you sign up with them by clicking this link I get a fee for helping them get a new borrower. These are all platforms that I use, where I have met officers of the firm at events or have referred friends or all of the above.