If you have several thousand dollars of miscellaneous debt floating around, such as credit cards or personal loans, it might be worth considering consolidating your debt into a single loan for convenience purposes and because it could very well save you a lot of money on interest.
Up until the recent crash in the real estate market, banks made it very easy for borrowers to refinance their various debts onto a home equity loan with attractive interest rates. Banks are now vary weary about offering such loans and Bank of America (NYSE: BAC) even went to the point of closing down existing home equity lines of some of its borrowers. If you want to refinance your debt in 2010 and beyond, you’re going to have to look beyond a home equity loan to make that happen.
One company that has inadvertently entered into the debt consolidation business is Lending Club, a company which operates a peer to peer lending marketplace. Borrowers on the site quickly figured out that they could get better interest rates than what they are paying on their credit cards and pay off their debt more quickly. The average interest rate that borrowers are paying on Lending Club is about 9%, far better than the 29.99% interest rate that Citigroup (NYSE: C) is charging its customers.
Let’s start with the following hypothetical example:
- $1,000 – Signature Loan at- 18%
- $3,200 – Credit Card – 30%
- $5,000 – Car Loan – 6%
- $2,000 – Engagement Ring – 15%
- Total: $11,200
The next thing to do is go through the Lending Club loan application process. After filling out some basic information, Lending Club will tell you what interest rate you can get a loan at.
Let’s say that Lending Club offers us a 9% interest rate. In our example above, it makes sense to refinance all of our debt, except the car loan, using Lending Club. Since the car loan is at 6%, we don’t want to raise the interest rate we are paying on it at 9%.
Next, create a list of the loans that have a higher interest rate than the loan that Lending Club offers you. In our example, it would be:
- $1,000 – Signature Loan at- 18%
- $3,200 – Credit Card – 30%
- $2,000 – Engagement Ring – 15%
- Total: $6,200
Then, go back to Lending Club and accept the loan offer for the reduced amount. Your loan will then go through a funding process and you should receive your money within a couple of weeks. Then, take the funds you receive from Lending Club and use it to pay off the debts you wish to consolidate.
Here’s what our loan situation looks like before the consolidation in our sample example:
- $1,000 – Signature Loan at- 18% ($180 Annual Interest)
- $3,200 – Credit Card – 30% ($960 Annual Interest)
- $5,000 – Car Loan – 6% ($300 Annual Interest)
- $2,000 – Engagement Ring – 15% ($300 Annual Interest)
- Total: $11,200
- Total Annual Interest: $1,740
Here’s what our loan situation will look like after the consolidation in our sample example:
- $5,000 – Car Loan – 6% ($300 Annual Interest)
- $6,200 – Lending Club – 9% ($558 Annual Interest)
- Total: $11,200
- Total Annual Interest: $858
The borrower in the example above is now saving nearly 50% ($882) of the total amount of interest that he or she was paying each year after the consolidation with Lending Club. You do have to consider the origination fee that Lending Club charges on the loan, in which would likely range from $200-$250, however the borrower still comes out ahead significantly.
