Does this scenario seem familiar?
It’s late at night and you are sitting down to pay bills. You make your payments on time so you should be fine, right? But you feel like you’re sinking. Do you have more credit cards than you did a year or two ago? Maybe you opened a 0% offer card to transfer a balance from a high interest rate card and the promo expired. Your low minimum payment amount likely jumped dramatically when the promo expired. Your already tight budget just got squeezed.
You’ve heard of online lending, which seems easier and more anonymous than going to your local credit union or bank. No one to judge you. You start searching online for a way to consolidate your credit card debt into a single monthly payment.
One online loan option that doesn’t feel sleazy (think online payday loans) is peer-to-peer lending (P2P), both an investment tool for people with money to lend and a borrowing tool for people who need a loan. Interest rates are often lower than storefront finance companies. But, as with most lending these days, the terms are largely determined by your credit score. The companies that act as the intermediary between investors and borrowers earn their profit by charging fees to both parties. More and more P2P companies are popping up, so it must be a lucrative business.
Look before you leap
The internet can be dangerous late at night, especially if a glass of wine is involved. At least for me.
- FIRST RULE: Don’t borrow money if you have had that glass of wine. You know those plans you make when you’re out with friends at happy hour and they never happen? It sounded like a good idea at the time, right? But then it never happens, which in some cases is a good thing. Well if you click that button and borrow money, you can’t take that action back the next day like a happy hour “promise.”
- SECOND RULE: Explore all of your options before making a decision. I can’t tell you how many times I’ve met with someone who had a P2P loan to consolidate their credit cards and deeply regretted the decision. The interest rate may be better than the credit cards, but the shorter length of the loan means larger payments that are not affordable. The larger payment then leads to more squeezing and more credit card use. Plus, often times the approved amount wasn’t sufficient to consolidate all the debt, so there are still other payments to be made.
Consolidating debt into a single loan whether P2P or at your financial institution may be a bad idea if…
- You don’t change actions or habits that led to the credit card debt in the first place – reducing spending or increasing income. The debt hole continues to get deeper and steeper.
- The APR isn’t that great because you are a higher credit risk due to the amount of outstanding credit balances. (Almost a third of your credit score is based on the percentage of available credit you are using—the closer to your limit you are, the more damage to your score.)
- Financial Counseling is first and foremost. Meet with a financial counselor at a non-profit consumer credit counseling agency (I’m partial to LSS Financial Counseling 🙂 ) to review your budget and discuss strategies and options. Click here to get started online
- Power Pay. This a good plan if you’ve got low interest rates on your credit cards and the means to put extra money toward one credit card payment. Carve out extra income from your budget (see step one) and apply it to the smallest debt. When that debt is paid off, roll that full amount to the next debt. Important: for this to work, you cannot add new debt to the cards (see step one).
- Debt Management Plan (DMP). The DMP can be miraculous, especially if you have high interest rates on your credit cards and/or are getting hit with late fees. Most creditors will drop the interest rates significantly, stop late fees, and often reduce the payment amount when you work with a non-profit consumer credit counseling agency like LSS. The debt is paid in less than five years and can mean savings of literally tens of thousands of dollars (depending on debt balances and current APRs.) Watch this video of how the DMP works: So what is a DMP, really?
So do research, look (and think) before you leap, and don’t make a rushed decision. There are options out there; just be sure to choose the best one for you.
Our Financial Counselors will evaluate your financial situation, create a budget with you, and provide unbiased advice and options – with concrete steps to take – to stabilize your finances and conquer your debt for good. Call us at 888.577.2227 to schedule your free and confidential session or click HERE to start online.
Author Mary Ellen Kaluza is a Certified Financial Counselor with LSS and she specializes in debt, credit, and budget counseling and education.