Borrowers are turning to peer-to-peer lending companies, such as Prosper Marketplace and Lending Club, for debt consolidation loans more than every other type of loan request made, according to new data from Prosper Marketplace.
Prosper has originated more than $190 million in peer-to-peer loans since the company was founded in 2006. A recent press release from the company indicated that about 45% of all loans over time have been for debt consolidation purposes, but that percentage has increased significantly in the last few months. Loan origination data from the month of January indicates that 59% of all borrowers that took out loans on Prosper’s peer-to-peer lending marketplace did so to consolidate debt.
Many believe that credit card companies raising their customers’ interest rates before the latest provisions of the Credit Card Act went into effect was a primary motivating factor for the increased demand in peer-to-peer debt consolidation loans. Provisions from the Credit Card Act now prevent credit card companies from arbitrarily raising interest rates on existing debt. As a result, banks increased their rates on credit cards because they would not have the flexibility to do so after the provisions went into effect.
Traditionally when taking out a debt consolidation loan, banks will push borrowers toward home-equity loans and other forms of second mortgages. Most consumer advocates advise against taking out loans that have your home as collateral because then banks can foreclose on your home if you do not pay your second-mortgage.
Borrowers that takeout loans on Prosper Marketplace or Lending Club can generally get unsecured loans with interest rates between 7% and 20%. Lending Club’s available data indicates that the average rate that borrowers are paying is around 9%.
