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.