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Debt Consolidation Loans from Peer Lending Sites

[Jul 27, 2009.]


If you’re lucky enough to live in a tight-knit community, your neighbors might consider banding together to help you get out of debt. If you belong to a church, a love offering or an outreach program could help reduce debt while you go through a family illness or job loss. However, if you’re like most Americans, you’re not quite as connected to your neighbors as your grandparents might have been. Borrowing money from relatives or close friends carries too much emotional baggage, narrowing your options if you’ve exhausted your lines of credit at traditional banks or credit unions.

In the spirit of networked community, some clever online services have figured out how to “crowdsource” emergency lending and community loans. Peer-to-peer lending websites allow members to lend small amounts of cash to other members. The sites aggregate the cash into amounts that can help borrowers consolidate debt or streamline monthly payments without resorting to cash advances or payday loans. Lending members reduce risk by spreading loans out among dozens of their peers. Borrowers face the same kinds of penalties and consequences for nonpayment as they would with a commercial bank, including interest rate hikes and collection activity. However, for borrowers with a serious intention to get out of debt, community lending sites offer a last resort that offers real hope.

How to Consolidate Credit Card Debt Using Peer-to-Peer Lending
Popular sites, like Prosper.com and Lending Club, make it easy for borrowers to apply for debt consolidation loans. The sites feel like a hybrid of eBay and the Bailey Building and Loan: prospective borrowers fill out applications and create public profiles that include pictures, personal histories, and links to social networking profiles. Borrowers complete formal requests that list both the amount of money needed and the purpose intended for the cash. FICO scores get translated into simple risk levels or letter grades that dictate the interest rates lenders may offer to borrowers.

How Personal Appeals Impact Consolidation Loans
Peer lending operates differently than commercial banking, allowing prospective borrowers to appeal directly to the sensibilities of lenders. Some lenders are hobbyists, interested in seeing whether small amounts of cash can earn more interest than a typical stock pick. Other lenders focus on specific missions, sometimes faith-based, to help other site members get out of debt. A third group of lender might be seen in some circles as predatory, deliberately seeking out high risk borrowers for high interest loans. However, caps on interest rates prevent peer loans from becoming usurious. In all three cases, borrowers can use notes, photos, videos, and blog postings to make emotional appeals to lenders. While the risk assessment algorithm at a commercial bank might not be swayed by pictures of a newborn, individual lending site members might feel compelled to act on a strong story.

Peer-to-Peer Debt Relief Still Requires Discipline
After earning a debt consolidation loan from a peer lending site, lenders can check your progress for the duration of the loan’s term. Not only must borrowers make minimum payments on time each month, they must also provide evidence that the loan is having the desired impact. Therefore, if you choose to seek a debt consolidation loan from a peer lending service, prepare for lenders to have a little more insight into your family’s daily life than you would grant to a typical bank. If you default on your loan, you’ll not only find yourself facing debt collectors, you’ll also be letting down a community of peers who have invested in your success.

Having cleared federal regulatory hurdles, peer lending services must now achieve licensure in each state. As more peer lending services gain the ability to do business in more states, borrowers can enjoy a stronger alternative for debt consolidation loans and other emergency funds.


About Author:

Joe Taylor Jr. is an internal business consultant for a Fortune 500 company, who writes about finance, culture, and design. He holds a Bachelor of Science in Communications from Ithaca College.

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