On February 22, 2010 new government regulations known as the CARD Act went into effect, limiting how credit card companies can raise rates on existing cardholder accounts and making borrowing more fair and transparent. But regardless of the new laws, banks will always look for innovative new ways to keep the shell game going and their profits high. And that’s when they’re lending at all. Tightening credit markets now make it more difficult for people to get loans, regardless of their credit and income.
As a result, many borrowers are now looking beyond the typical financial institutions and borrowing directly from other individuals through peer-to-peer lending. Also known as person-to-person or P2P, it’s the process by which everyday Americans lend and borrow without using a bank as the middleman.
These transactions have always existed, primarily between family and friends. Now complete strangers are making loans to one another aided in large part by the Internet. Just like the web matches buyers and sellers on sites like eBay and Craigslist, a host of web sites now bring together people looking to get or extend credit. And business is booming.
Sites like Lending Club and Prosper.com let investors bid on potential loan opportunities based on the creditworthiness of the people who request loans. Once funded, these loans are usually administered by the websites who collect payments and keep investors informed of their loans’ performance. Investors can minimize their risk by spreading their funds over many loans.
This is a great deal for both parties involved. Borrowers get to consolidate their loans at lower interest rates than they are currently paying and lenders get paid more for their money than banks currently offer on savings accounts or certificates of deposit. The sites make money on fees charged to borrowers or lenders, or by taking a percentage of interest paid on loans.
I have actually funded a few loans on Prosper and find the site easy to use and communication excellent.
Of course the real question is, how can this help you get out of debt? Easy. If you are unable to negotiate rate reductions from your credit card companies (or get a new card with a high limit and low rate) then peer-to-peer lending is worth exploring. You’ll be able to have thousands of potential lenders fund your loan request without having thousands of new inquiries in your credit file.
Many sites allow you to explain why your are in debt and what makes you a good credit risk, which isn’t possible to do through the automated scoring and approval process that the big banks use.
Also helpful is the fact that these loans are typically for a fixed period of time (e.g. three years) which gives you a set time when your debt will be paid off. If you’re just making the minimum payments on your credit cards, you know that there isn’t an end in sight for when the balances will be fully paid off.
So if consolidating your debt is one of your action items for 2010, check out P2P lending as one of your options. It’s yet another one of the ways to screw your credit card companies by taking money out of their pockets.