Borrow Money With Prosper & Lending Club

December 22, 2009 by Jim

I hosted a guest post by Jonathan sharing his experiences with borrowing money from peer to peer lending network Prosper. Just recently, I received the following email from a reader singing their praises:

I’ve borrowed twice now from Prosper and I love it. The first loan was $7000 at 8.65% for three years and the most recent was $8000 at 9.65% for three years. I got the 2nd in response to the credit cards jacking up my interest rate and slashing my credit limit no reason. I was so angry about the credit card behaviors that I wanted to get my debts as far away from them as possible.

There is no hassle, I applied for the loan, watched people bid the initial interest rate down, and eventually got the cash. Once the loan was funded, they called me to verify who I was. You have to provide documentation that you are who you say. They direct deposit the money into the account you specify a day or so later.

Benefits

With lenders being very strict about who they offer loans to and credit cards slamming people with interest rate hikes and fees, borrowers are turning towards some atypical sources of funding to help pay down debt. Loans from peer to peer lending networks have some significant benefits:

  • Fixed interest rate: Unlike credit cards, these loans have fixed interest rates that will not change. The rates can’t be lowered or increased simply because the lender “feels” like it or because some equation tells them you’re suddenly riskier.
  • You can’t add to the debt: One of the difficulties with getting out of credit card debt is in the card itself. If you’re in debt, you can continue to pile on the expenses. That’s akin to digging your own grave when you think you’re filling in the hole!
  • Loans are reported to credit bureaus: This is a huge benefit that helps you battle down debt and build up your credit at the same time. You aren’t penalized for going to a p2p loan.
  • You’re done in 3 years: The loans are for a period of three years so you aren’t paying for a $10 pizza for the next ten years because of interest!
  • You get the best possible interest rate: When you go to the bank or stick with a credit card, they dictate the interest rate you get. With these loan marketplaces, investors bid down the interest you’ll pay. You set an initial number, investors, based on your credit history and current debt, can bid the interest rate down.

Downsides

There are a few potential negatives about going to peer to peer networks for funding:

  1. The process can take a long time. It’s not uncommon for the process to take a month, which is how long it took for the reader to finish the process and that may be too long depending on your needs. The reason why the process takes so long is because they work like auctions, with investors bidding on how much interest they’re willing to accept to loan you funds.
  2. High credit requirements. Both networks require relatively high credit scores:
    • Lending Club is open to US residents with a FICO score of at least 660 and a debt-to-income ratio (excluding mortgage) below 25%. You need at least 3 years of credit history with no current delinquencies, recent bankruptcies, open tax liens, charge-offs, or non-medical collections account in the last 12 months. No more than 10 inquiries in the last 6 months, a revolving credit utilization of less than 100%, and more than 3 accounts on your report, of which at least two must currently be open.
    • Prosper is open to US residents with a FICO score of at least 640 and must be “approved by Prosper’s anti-fraud and identity verification systems.” It’s unclear how those systems operate.

I’ve never personally gone through the borrowing process but it seems painless enough. The prospect of having a credit card debt charging me double digit interest rates has always kept me out of that particular danger, but if I was in that situation, a single digit, fixed interest rate 3 year loan sounds mighty appealing.

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