According to CreditCards.com, over 40% of US households are carrying credit card debt from month to month, to the tune of an average amount of almost $5,000 per adult. That means that well over a third of us are technically living outside our means.
Credit cards, especially those with loyalty points or cash back, can be a very useful financial tool. But, if you don’t have the financial discipline to pay off your balances each month, you can soon find yourself on an interest-laden hamster wheel of minimum payments.
If you find yourself falling deeper and deeper into credit card debt and you want to break the cycle, we’re here to help. The good news is that there are plenty of strategies available for paying down those balances with the aim of finally living debt free.
The strategy we’re going to focus on today involves refinancing your credit card debt, specifically by using peer-to-peer lending.
If you’re not familiar, peer-to-peer lending is a relatively new financial concept. Instead of banks lending money to individuals, peer-to-peer-lending networks connect investors with people who need loans. To the borrower, the interest rates are generally lower than their credit cards’ rates. To the investor, the return is better than a savings account, without the potential volatility of the stock market.
Peer-to-peer-lending networks can be a win-win for everyone, especially if you’re looking to consolidate and pay off your credit cards.
How It Works
Getting a personal loan from peer-to-peer networks like Lending Club and Prosper is actually pretty fast and easy. You’ll need to create an account and provide some personal and financial information. Once you’ve entered the amount you’d like to borrow, the sites then use your credit information to determine your risk, which will then influence the interest rate of your personal loan.
Your risk profile (without your personal information) is then shopped around to investors, who then fund your loan – usually within a few days.
So, instead of paying the national average 15% APR on potentially multiple balances, you can borrow enough from a peer-to-peer network at a lower rate (usually from 6 – 8% APR for people with good credit) to pay off those cards.
Advantages of Using Peer-to-Peer Loans to Pay Off Credit Cards
- Quick Payoff – If you use peer-to-peer-lending networks, you can pay off your credit cards instantaneously. Once your loan is approved, the money is transferred to your account quickly.
- Lower Interest Rates – If you have good credit, you’re a lower risk. There’s a good chance your peer-to-peer loan rate could be half of what your credit card interest rate is, meaning you’ll pay less money in over the repayment process.
- Automatic and Convenient – If you consolidate and refinance your credit cards with a peer-to-peer loan, you can opt to have the monthly payments to be automatically deducted from your account. You don’t have to manage the repayment of multiple credit cards, and you won’t have to figure out how much of a payment you’ll apply to which card.
Other Factors to Consider When Using Peer-to-Peer Loans
- Fixed Term and Fixed Payments – Like your mortgage, the payment you’ll have for your peer-to-peer loan will be fixed during the repayment period. That means you won’t have those tempting low minimum balances like with your credit cards.
- Pre-payment Isn’t Easy – While there are no pre-payment penalties (meaning you could pay off the whole balance without fees at any time), pre-payment isn’t as easy with this method as it is with your credit card. Chances are, if you’re on automatic payments, repaying the entire loan at any time will involve a phone call or two, and mailing a check.
- Don’t Fall into Trouble Again – Peer-to-peer-lending networks allow you to pay off all of your credit cards quickly. You need to be extra careful not to fall into old spending habits, or you could end up with credit card balances again – plus a personal loan that you need to repay.
When it comes to paying off your credit cards, you want to pay off the highest interest rates as fast as possible. If you have good credit, peer-to-peer personal loans can be an effective way of consolidating your debt and lowering your interest rate.
Regardless of your strategy, ridding yourself of credit card debt is always a good financial decision.
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