Eradicate credit card debt with peer-to-peer lending

People sick of paying off a credit card balance at astronomical rates are increasingly turning to peer-to-peer lending sites, such as Prosper.com or Lending Club, to get personal loans, so they can say transfer their debts away from credit card companies.

These “crowd funding” sites let borrowers advertise their loan needs, such as for starting a home business, buying an engagement ring, or putting a new garage on their house, to potentially thousands of individual investors. But, paying down credit card debt is now the No. 1 reason people use these sites. Credit card payoffs make up about 60 percent of the loans at Prosper.com, and 80 percent at Lending Club.

The hope for prospective borrowers is that if their credit-card interest rate is 20 percent, and they can score a 10 percent loan, for example, through one of these sites, they can save the difference. And you’ll be paying back your fellow humans over a three- or five-year period, instead of a nameless, faceless company—with which you’re probably already dissatisfied.

These loans—which you receive in a lump sum—can be at interest rates just under 7 percent, but they can also be as high as 30 percent at Lending Club and 35 percent at Prosper, depending on your credit score, income, and the reason you’re borrowing money.

To understand the costs, we applied for a loan using a real person’s financial information for the purpose of paying off a $5,000 credit card balance. With an excellent credit score and job paying $72,000 annually, our borrower was offered a 3-year loan with an APR of 6.78 with Lending Club and 8.33 with Prosper, which comes out to $152.18 and $154.36 in monthly payments respectively. Over 36 months our borrower would pay about $78 more with Prosper than Lending Club.

It pays to compare. One thing you don't have to worry about is getting your score lowered simply by virtue of making the inquiry. According to Prosper and Lending Club, entering your personal info to get a quote won’t damage your credit. You even get a free Experian credit score from Prosper when you ask for an online quote. So, try out both sites and compare the rates you’re quoted. Then compare them to these other more traditional ways of reducing credit card debt.

Transferring a balance to a new credit card. This used to be the best option for lowering the interest charges on credit card debt. But, nowadays most cards charge a fee of 3 percent or more on balance transfers. So, if you roll over a $5,000 balance you’ll pay $150 right off the bat, assuming a 3 percent transfer fee.

One of the few good balance transfer cards left is the Chase Slate card. It’s offering 0 percent for 15 months on transfers (and purchases) with no transfer fee, provided you transfer a balance within 60 days of opening your account. But after the introductory period, your APR will jump to 12.99 percent, 17.99 percent, or 22.99 percent, depending on your creditworthiness.

So, if you can’t pay off your card in two years, choose one of several Pentagon Federal Credit Union cards offering a 4.99 percent APR promotional balance transfer rate on transfers through Sept. 30, 2013, for the life of balance with no balance transfer fee.

Tapping your home equity. This can get you a very attractive interest rate. According to Bankrate.com, the national average for borrowing $30,000 against your home is 4.98 percent with a home equity line of credit (HELOC) and 6.08 percent with a home equity loan, as of Aug. 21. But, you are now putting your house on the line if you can’t pay, so be careful with this strategy.

Negotiating with creditors. If you're on the brink of default and don’t qualify for other loans, you may be eligible for a need-based reduction in your interest rate. Try asking your credit card company for this reduction. Don’t be enticed by debt consolidation companies’ offers to eliminate your credit card debt. They can often be scams. A better alternative is scheduling a free consultation with a credit counseling agency affiliated with the National Foundation for Credit Counseling. Also check the Department of Justice’s list of approved counselors by state.

- Chris Fichera