If you’re a student loan borrower, then you are always looking for ways to lower your payments. This is even “truer” if you have private student loans.
But one option most student loan borrowers don’t think about is looking at peer-to-peer lending for help. If you have student loan debt, you’ve likely already looked at student loan forgiveness programs, and maybe you’ve even looked at refinancing your student loans in a traditional way. But have you looked at getting a peer-to-peer loan to pay off your student loan debt?
Here’s what you need to know about using P2P lending to lower your student loan payments.
What Is Peer-to-Peer Lending?
Just like it sounds, peer-to-peer lending is the process of one person lending money to another person. How this works online is that the borrower posts a loan request online, inputs all their information and how they plan to use the loan, and then investors from all over the United States can contribute to that loan in any amount they want. When the loan is fully funded, the marketplace will distribute the loan to the borrower, and then process the payments each month on behalf of the investors.
To show a real life scenario, you might have a borrower looking for $5,000. Then, you could get 50 different investors to all invest $100 into the loan. Each month, the borrower would make a payment, and each of the investors would get their cut of the payment – principal and interest.
There are two major companies that do P2P Lending: Prosper and LendingClub. Both are very similar in what they offer both borrowers and investors, however, their platforms are a little different.
How Can You Use P2P Loans To Lower Your Student Loan Payments?
So, that’s great that you can borrow from other people on the Internet, but how can that actually lower your student loan payments? Well, you can borrower through P2P lending for debt consolidation, and use your newly borrowed money to pay off your existing student loans.
Remember, when you refinance a student loan, what you’re really doing is taking out a brand new loan, and using this new loan to pay off your old loan. The new loan likely has better interest rates, payments, or time duration, which is why it makes sense to do it.
The same system works for P2P Lending. Right now (in October 2015), both Propser and LendingClub offer borrowers with excellent credit interest rates as low as 5.99% – which could potentially be lower than what standard student loan refinancing offers.
P2P loans are also fixed rate loans, meaning that they won’t change over the life of the loan. However, most student loan refinancing loans are variable rate, which means they could go up in the future.
Therefore, if you can get a great fixed rate P2P loan, it might make more sense than a traditional refinanced student loan and save you money!
Using Prosper For P2P Loans
The motto of Prosper is that everyone can prosper from P2P Lending. And student loan borrowers definitely have the potential to lock in great rates with Prosper.
For borrowers, Prosper offer debt consolidation loans, which is what you’d want to borrower for to pay off your student loan debt. Here is an example of a borrower’s listing on Prosper for debt consolidation:
You can see that this borrower has excellent credit, and is able to qualify for a $15,000 loan for 7.74%. This loan is a fixed rate loan for 5 years.
How does this compare to traditional student loan refinancing? Well, if you wanted to get a 5 year variable rate student loan, you would have an initial payment of $272 per month, which is lower than the $302.28 on this P2P loan. However, the traditional refinancing loan is variable, and interest rates will rise in the coming years – meaning your payment will go up.
The question is, will it rise by $30 per month in the next 5 years or not? It’s a tough question, but if you don’t like to gamble, then the risks of the P2P loan are lower.
Using LendingClub For P2P Loans
LendingClub is the largest P2P loan lender, and they also offer debt consolidation loans at great interest rates for borrowers that have excellent credit.
Here’s an example of a LendingClub listing:
As you can see, this borrower is looking for $25,000 to consolidate their debts (which likely include credit cards and student loans). They have excellent credit, and so they qualify for a consolidation loan at just 5.32%. This is a 3 year loan, and the monthly payments would be $752.87 per month.
That may seem high, but most student loan refinancing lenders only offer a minimum of 5 year terms. So, even if this borrower received a lower interest rate on their loan, having the 3 year term will save him money. Take a look:
This is a great example, where if you can afford the monthly payments, going with a P2P consolidation loan could make a lot of sense for your student loan debt.
Is P2P Lending Really Better Than Traditional Student Loan Refinancing?
The answer to this is: it depends.
It depends on several factors, but it never hurts to shop around to find the best student loan refinancing option for you.
First, if you have Federal student loan debt, it rarely makes sense to refinance into a private or P2P student loan. If you need to lower your payments on a Federal student loan, you should look at changing your repayment plan to something more affordable. With Federal loans, you also have the various student loan forgiveness programs that you may qualify for, and you’ll lose those opportunities if you refinance.
Second, if you know that you do want to refinance, simply compare all of your options. We have a great student loan comparison tool that compares the top traditional student loan lenders for you (for free). After using that tool, look at both Prosper and Lending Club and see if you can get a better rate there. It never hurts to shop around, especially when it comes to saving money.
Have you ever used P2P Lending for your student loan debt?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
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