Whether you’ve accidentally found yourself in debt from a few sources and want to consolidate, or if you’ve realized that you’re paying far too much in terms of interest rates, taking the first step toward a debt consolidation loan is an excellent idea. It is a great way for you to save yourself money, save yourself hassle, and possibly improve your credit score, too.
But once you’ve made the decision to get a loan, the next steps can be somewhat daunting. Different options are available to different people, depending on their credit scores and other factors. You may be able to pursue a personal loan or debt relief negotiation, depending on your credit, your income, and the amount of debt that you have. But first, let’s look at what exactly is meant by “personal loans” and “debt relief”:
You might think that any loan taken out by a person is a personal loan, but a “personal loan” refers to a loan that is disbursed for something other than a vehicle, education, or the purchase of a home. Many banks and lenders will ask why you need a personal loan, but many people choose personal loans to consolidate debt.
According to FoxBusiness.com, 24 million consumers are likely to get a personal loan in the next 12 months. This is according to the survey of Bankrate.
You can get personal loans from your bank, but you also can obtain them from peer-to-peer lending sites. One of the major peer-to-peer sites is Prosper.com. This site offers loans that are financed by investors, some of whom invest as little as $25 at a time (hence the title of “peer-to-peer” lending). However, these loans – which generally come at a low-interest rate – are generally only available to those with excellent credit, making them challenging or impossible for those with poorer credit to obtain.
If you’ve ever been in serious debt, you know the panic that comes with struggling to stay afloat financially. Poor or bad credit can become a self-perpetuating cycle, and break out can feel impossible. However, there’s still hope for those who have poor credit. If you’ve tried and failed to qualify for a low-rate personal loan, you can apply with an organization like National Debt Relief and get a rate for consolidation.
While National Debt Relief notes that their services are not free, this company will work with its clients to negotiate a repayment plan that won’t derail their financial future and can help them get out from under their seemingly crushing debt. National Debt Relief is rated A+ by the Better Business Bureau, and the site has several resources on your options, ranging from bankruptcy declaration to personal loans to debt relief negotiation.
Pursuing a Personal Loan
When you decide to look at a personal loan, it’s important to shop around a bit if you want the best rate. But even before you start calculating your loan rates, it can help to compare lenders. And being sure that you choose an excellent lender is a good start. Prosper has been ranked as the #2 peer-to-peer lender in the U.S., but its accessibility (especially when compared to other lenders) makes it a great choice for many.
Prosper has its own algorithm to calculate your loan interest rates instantly. So while you may feel like you need to dig deep into this lender’s terms, you can actually apply for a loan and receive an instant quote back.
More On Prosper’s Rate Calculations
If you do want to learn a bit more about how Prosper evaluates potential lenders, it can be helpful to evaluate the factors that influence the company’s evaluation of potential borrowers. Every peer-to-peer lender is going to have detailed criteria it uses to evaluate borrowers, but not all companies use the same algorithm for evaluations. Prosper’s evaluation process, as explained below, is a somewhat non-traditional one that may even be a better estimator of creditworthiness than a FICO score (or score from another bureau) alone.
Prosper will put any application through an evaluation process, it incorporates innovative ways of looking at credit that, at least according to the company, provide a more accurate look into a person’s creditworthiness than a regular credit score will. This is good news for those who may have credit slip-ups in the past but are on the way to better credit. It’s also good if you have a limited credit history. Here are Prosper’s basic requirements:
- you must be a U.S. resident
- you must have a FICO score of at least 640
- you must have a bank account
- you must have a social security number
Once you’ve met these requirements, Prosper will evaluate your competitive and economic environment, your loan term, and expected loss. They also assign a “Prosper rating,” which is more important than many of the other factors. The Prosper rating is a combination of the FICO score and a “Prosper score.” The Prosper score is used to determine the likelihood of a loan falling 61 days or more past due. This sounds like a challenging figure to calculate, but the company takes into account the following:
- how often you use existing credit and debit cards
- delinquent accounts
- number of accounts inquiries
- number of recently opened accounts
- how much credit is available on your accounts
The logic behind Prosper’s innovative evaluation process is that it, at least in theory, helps out borrowers by taking a multifaceted look at their credit history. It also helps lenders because the prediction of creditworthiness is thought to be ultimately more accurate.
How Does Prosper Stack Up?
While finding a great interest rate is likely your top priority in selecting a personal loan provider, it can be very helpful to look at the general pros and cons of each company – not just the pros and cons that have to do with interest rates. Below is a listing of the major pros and cons of choosing Prosper as your peer-to-peer lender. As always, make sure you do your research before committing to this or any peer-to-peer lender.
- Prosper has lower starting APRs than many similar lenders.
- The minimum credit score to borrow is lower than many lenders, making it more accessible, even if your credit is less than ideal.
- It offers several types of personal loans, specialized to fit life events like military service, having a baby, and more. In the world of peer-to-peer lending, this kind of specialization is rare.
- There’s a loan cap of $35,000, which is generally ok for most personal loan debt, but not all.This issue tends to affect those taking out loans for small businesses more than those taking out debt consolidation loans.
- Loan repayments are only available for 36 or 60 months, so your loan repayment options are limited.
- Clients have reported that the web platform is challenging to navigate.Though website navigation is a subjective experience, the number of complaints suggests that the site may have some legitimate issues.
- According to customer service boards, many customers have complaints about customer service (beyond just complaints about the website accessibility).
How Much Will a Loan Cost Me?
Assuming you meet the criteria for a personal loan at Prosper, it’s important to ask yourself how much a given loan will cost in terms of interest and hidden fees. Below are some examples of APRs and other fees associated with varying loan amounts and interest rates at Prosper. (See above for a larger discussion on how Prosper determines your interest rate.) These are some examples to help illustrate how much you’ll end up repaying over time, depending on the length of your repayment term,your interest rate, and the amount of the loan:
$5,000, 3-year term, 7.0% interest rate:
- Monthly payment: $154.39
- Total interest paid: $557.88
$10,000, 3-year term, 7.0% interest rate:
- Monthly payment: $308.77
- Total interest paid: $1,115.75
$20,000, 3-year term, 7.0% interest rate:
- Monthly payment: $617.54
- Total interest paid: $2,231.51
$30,000, 3-year term, 7.0% interest rate:
- Monthly payment: $926.31
- Total interest paid: $3,347.26
If you have poorer credit, your interest rate will likely be higher. Here are the same calculations, but with a 17 percent interest rate. (In general, if you have excellent credit, your rate will be about 5.9% interest. Good credit will land you 7-16% APR, and fair credit will get you 17-30% APR.)
$5,000, 3-year term, 17.0% interest rate:
- Monthly payment: $178.26
- Total interest paid: $1,417.49
$10,000, 3-year term, 17.0% interest rate:
- Monthly payment:$356.53
- Total interest paid: $2,834.98
$20,000, 3-year term, 17.0% interest rate:
- Monthly payment:$1,069.58
- Total interest paid: $8,504.95
While Prosper tends to have lower interest rates than some other lenders, it’s always wise to shop around to make sure you’re getting the best rate. Prosper keeps fees to a minimum, but with this and any lender, reading the fine print is important. You don’t want to get locked into a loan agreement that has you paying more than you need to.
If Your Credit Score Won’t Allow You a Personal Loan
While getting a personal loan is ideal if you need to consolidate debt, it sometimes isn’t possible given your credit history. According to the latest State of Credit published on Experian.com, the average credit score in 2015 is 669. This improved from 666 rating in 2014. This is not the ideal score – not at the bottom but not too stellar either.
If you have a less than favorable credit score, then pursuing debt consolidation via negotiation is a good option. If you contact National Debt Relief, you’ll find that, depending on your situation, you’ll be able to work with people who can help you to deal with debt constructively.
This organization offers debt relief, debt settlement, assistance with bankruptcy, and more. It’s difficult to give examples of quotes, as debt relief and consolidation is a highly individualized process. However, this company and many others like it are dedicated to working with those who struggle with debt. Different solutions will be available for different situations, but regardless of your financial troubles, you’ll likely find yourself in a better position to deal with debt. In addition, the knowledge you gain while determining how to best resolve your debt crisis can help you avoid crippling debt in the future. Financial savvy is a good thing to have.
Debt is a heavy subject to deal with, and you should congratulate yourself for taking the first step in researching how best to remedy debt issues. With some focus, and with some shopping around for the best rates, you can be well on your way to solving – or at least improving – issues with debt, as well as moving toward a complete financial literacy.