When Matt Jabs compared the interest rates on his three credit
cards and auto loan with those offered through a popular
peer-to-peer lending site, it was a no-brainer to use the
"All were at a higher interest than the interest rate through
Lending Club," he said. "It also simplified my repayments."
As the founder of websites
, Jabs is particular about which products and services he
recommends to others. However, he is enthusiastic in his support of
So much so that after his own loan was funded in three days and
paid off in seven months, Jabs turned around and became an investor
at Lending Club himself. In the past two and half years, he has
helped fund approximately 100 notes and had a net annualized return
of about 10 percent last year.
Basics of peer-to-peer lending
Jabs is part of a growing number of people who are leaving the
banks behind and instead turning to individual investors for money
to consolidate credit card debt, fund business start-ups or even
pay for dream vacations.
What started as a financial sideshow in 2006 has grown into a
legitimate industry with benefits for both borrowers and investors.
The two biggest names in the game are Prosper and Lending Club
which have collectively facilitated loans totaling more than $1
billion as of May 2012.
The premise behind peer-to-peer lending is simple. Borrowers
submit an online application stating the reason for the loan and
amount desired. Investors can then review applications and agree to
loan money for requests they deem worthwhile.
To facilitate the process, lending sites run a credit check and
assign a level of risk to the loan. Depending on the risk level,
interest rates can run from less than 7 percent to more than 35
percent. Generally, loans are funded by a number of different
investors pitching in amounts as little as $25. Once the loan is
funded, the peer-to-peer site distributes the loan amount as well
as collects the monthly payments.
Paying off credit cards with peer lending
While peer-to-peer loans can be used for any purpose, debt
consolidation and credit card pay-offs top the list of requests.
According to Lending Club, nearly 70 percent of all borrowers
report using their money for these purposes.
Karen Carlson is the Director of Education and Creative Programs
InCharge Debt Solutions
, a non-profit credit counseling agency. She says peer-to-peer
lending offers an alternative for borrowers who might be turned
away from banks and other traditional lending outlets.
"Peer-to-peer lending is probably popular right now because of
the tighter credit market," she said.
In addition, with peer-to-peer sites offering interest rates
dipping below seven percent for highly qualified applicants,
consolidating debt through a peer loan can make sense financially,
a point that Jabs is quick to make.
"It's a really, really good option," said Jabs. "As long as you
consolidate for lower rates, it makes sense."
Other options for debt repayment
Still, Carlson, who incidentally also invests money at Lending
Club, cautions that peer-to-peer lending may not be the best option
"If you have had difficulty living within your means,
peer-to-peer lending may not be right for you," she said.
Instead she advocates for the use of debt management programs
that can not only reduce interest rates below what is offered at
peer-lending sites, but also address the underlying problem that
led to the debt in the first place.
"What is going to keep you from maxing out your credit cards
again?" Carlson asked.
She points to the success of InCharge Debt Solutions which has
helped more than a million people pay off $2.8 billion worth of
debt through what she terms a combination of 'education and
inspiration.' However, not everyone will qualify for debt
management programs and for those individuals, peer-to-peer lending
might make sense.
Another option may be to use zero balance transfer offers from
other credit cards says Nickel, founder of personal finance website
and one of the investors in Jabs' loan. However, those offers
usually have tight time limits and may not be available to all
Making the decision to use peer-to-peer lending
When it comes to deciding whether to take out a peer-to-peer
loan, almost everyone is in agreement that this form of lending
poses little risk for borrowers.
"You know exactly what you're getting into and, if approved, you
get the money and are able to put it to work right away," said
Nickel. "The risk lies with the lenders, who may or may not get
Despite the limited risk, Carlson says borrowers should still do
their homework. They should shop around, read the fine print,
consider alternatives and look at the root cause of their debt. In
addition, each site offers different interest rates and loan terms
that should be taken into consideration.
For example, Prosper will extend loans from $2,000-$25,000 for
one, three or five year terms. Meanwhile, Lending Club offers the
opportunity to borrow up to $35,000 for three or five year
Ultimately, Jabs reminds those interested in peer-to-peer
lending that investors are selective about who they are willing to
fund. While more than 60,000 loans have been funded through Lending
Club, another 550,000 have been declined. That means that, like all
things in life, there are no guarantees with peer-to-peer