Consolidate Your High Interest Debt With Lending Club
Tip It!Year in and year out, one of the most common New Year’s resolutions is to get out of debt. With that in mind, I wanted to talk a bit about using Lending Club to consolidate and refinance your high interest debt while you pay it off.
Those of you that have been following along know that I’ve been investing in Lending Club notes for awhile now. What I haven’t spend much time talking about is the other side of the coin — borrowing money from Lending Club.
While I’ve written a lot in the past about using 0% balance transfers to consolidate your debt, such offers have gotten a lot harder to find and considerably more restrictive.
Why use Lending Club?
Aside from providing investors like me with more loans to invest in, one of the biggest reasons to use Lending Club to consolidate your debt is that you’ll get a relatively low, fixed rate. For those that are unaware, Lending Club loans have a 36 month repayment period, and their rates start at 7.89%.
In other words, if you consolidate with a Lending Club loan and then stick to the plan, you’ll have your debt paid off in no more than three years. It’s also worth noting that there’s no prepayment penalty, so you – even less if you make extra payments.
Who can borrow via Lending Club?
Pretty much anyone can apply for a loan through Lending Club, but fewer than 10% of all applications get approved and funded. Just to be sure you’re not wasting your time, here’s a rundown of their general requirements:
- Minimum FICO credit score of 660
- Debt-to-income (DTI) ratio of <25% (excluding mortgage payments)
- Credit history of at least three years
- No current delinquencies
- No bankruptcies within the past seven years
- No more than ten recent credit inquiries
How much does Lending Club cost?
As I noted above, Lending Club offers fixed rates as low as 7.89%. Beyond this, the primary cost is a borrower processing fee, which starts at 1.25% for the highest quality borrowers, and goes up to 4.5% for the lowest credit grades. This processing fee is deducted from your loan amount, and is only assessed if your loan is funded.
There’s also a small service charge on the investor side whenever a payment is credited. That’s really a non-issue from the borrower’s perspective, though, as it’s built into the stated interest rate.
What’s the risk?
While Lending Club investors run the risk that borrowers might default (in fact, one of my high risk loans has defaulted), there’s no real risk from the borrower’s perspective. Assuming that your loan is approved and funded, the money is transferred into your linked bank account (minus the processing fee). If your loan isn’t funded, you pay nothing.
Of course, all the usual debt reduction caveats apply. For example, if you consolidate your debt and then keep using your credit cards, you’ll wind up in an even deeper hole. But if you’re committed to getting out of debt, consolidating and refinancing via Lending Club could be a great tool.
Don’t believe me? Just ask FCN staff writer Matt Jabs, who consolidated about $11k worth of debt and is currently saving a ton on interest.
Published on January 4th, 2010 - 7 Comments
Filed under: Debt Reduction
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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January 4th, 2010 at 9:26 am
Lending Club is an interesting concept. I am curious, is this a sponsored/paid post?
January 4th, 2010 at 9:40 am
L: Good question. We don’t do paid posts on this site. As I said above, I’m an active Lending Club investor and have written extensively about that side of things. On the other hand, one of our staff writers (Matt) has used LC to refinance his credit card debt (link) and has been very happy with his experience. Thus, I thought it would be worth writing this up as a viable alternative to things like 0% balance transfer offers, which are getting harder to find and much more restrictive.
January 4th, 2010 at 10:24 am
Thanks for the post. I have been investigating Lending Club and its competitor Prosper as of late. On average, it seems are making a rate comparable to what you would historically on the stock market. Also, I think this investment strategy is a little more satisfying helping individuals meet their goals and it being more hands on than putting money in an index fund and forgetting about it.
January 4th, 2010 at 10:37 am
@Nickel
Lending Club says that they lenders must meet certain financial minimums before they can lend. Are these on the honor system, or are they enforced?
Also, there’s an omission in your post. You write “fewer than all applications get approved and funded.” While that statement is true, I’m sure you meant to stick an actual number in that sentence.
@Ben
As a former (well, I’m still stuck until July) lender on Prosper, I suggest that you don’t lend there. I was a guinea pig (er, early adopter) over there, and wasn’t pleased with the business model, the returns, or Prosper management. I haven’t given Lending Club a shot yet, but am waiting to see how the masses do before experimenting with my investments again.
January 4th, 2010 at 11:44 am
Dan: Thanks for the catch. Yes, there should be a number in there… Fewer than 10% of all apps get approved/funded. As for LC vs. Prosper, I’ve heard horror stories about investing via Prosper. So far so good with LC, though I’m still being rather cautious.
As far as lender requirements go, I think it’s on the honor system. I don’t think they verify you assets or anything like that.
January 4th, 2010 at 12:17 pm
Thank you very much for clarifying! I am glad this is not a sponsored post, and I will certainly have to take a look at Lending Club.
January 4th, 2010 at 12:38 pm
@L. Johnson: As Nickel said… I am currently borrowing with Lending Club. I consolidated 4 high interest debts into one loan with LC and have been VERY happy with the entire process.
Check out my entire experience by reading my Lending Club Review.
Make sure if you go this route that you only consolidate debts that have higher current rates than what you can get through Lending Club, and make sure you calculate out the interest savings for both routes.
For me I will end up saving about $500 in interest by consolidating with Lending Club, and that includes the $80 loan processing fee, so it was a really good deal for my situation – that is why I always advise people to follow the same route if it makes sense for their situation.