How to Use Lending Club to Pay Off Debt

If you’ve dug yourself into a hole in regards to your debt burden it can sometimes be impossible to dig out without filing bankruptcy. The minimum payments, late fees, and interest charges continue to rise to a point that you simply can’t earn enough money in a given month to pay everyone. Your credit score starts to dwindle and with it goes your ability to refinance some of your debt in order to lower your overall outgoing payments each month.

It’s ironic because under most situations, even when you’ve got too much debt, you are still getting offers to take on additional debt to help you juggle your balances through balance transfers and the like. But eventually the amount of debt you are carrying goes too high and no financial institution will throw you a lifeline.

All hope is not lost if you are in this situation. There is one potential lifeline left: peer-to-peer lending.

What is Peer-to-Peer Lending?

Peer-to-Peer lending (or P2P) is where a group of individuals, not a financial institution, lend money out to other individuals. One borrower might have 50 people they are repaying each month and each payment made is split back up amongst the individual lenders.

P2P lending isn’t free because the individuals loaning you the money expect a return on their investment. Yet the rates charged may be significantly lower than what a financing company would charge you. You can get a P2P loan through popular P2P lending websites like Lending Club. Lending Club helps connect people needing to borrow money with individuals looking to lend money for profit, and takes a small cut of the overall transaction.

How Can Lending Club Help You Get Out of Debt?

Since individuals have different risk profiles than financial organizations, you may be able to get a loan at a low enough interest rate to consolidate all of your payments back down to a level you can afford. Instead of owing three different credit card companies debts of 16%, 19% and 22%, you could get one loan through Lending Club at 11.5% and save thousands of dollars in interest.

Lending Club Prevents Adding to Your Debt

One of the benefits of using Lending Club to pay off your other debts is, if done correctly, it can prevent you from adding to your debt in the future.

Here’s how: You have three credit cards with balances of $5,000 (at 16%), $2,000 (at 18%), and $800 (at 22%). If you just pay the minimum payments you will be in debt for over 26 years and pay $12,965 in interest on top of the $7,800 in principal that you owe.

You get a Lending Club loan for $7,800 at 11.5% and use the proceeds to pay off your credit cards. This alone would drop your interest from $12,965 on the credit cards to $1,460 with the Lending Club loan. Your payments would increase from (assuming 2% minimum payments for the credit card) $156 in total to $257.21 with the Lending Club loan, but the extra you pay helps drastically reduce your total interest paid.

Here’s the kicker: your Lending Club loan will last 3 years. To make sure that you don’t add insult to injury by consolidating your debts and then getting new debts, you need to cut up your credit cards. You can keep your credit card accounts open for the health of your credit score if they don’t have annual fees, but you cannot use them. Cut up the cards or freeze them in a block of ice. This is the only way to keep yourself from compounding your debt problem by having new debt on top of old.

Have you used Lending Club to help you pay off debt? How did it work out? Leave a comment!

Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He's building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, ING Direct, and many others.

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