Lending Club: an alternative to credit cards

Posted by Rex Dixon :: June 1, 2007 @ 8:24 am

Today we would like to share with our readers an excerpt of a letter that was included in the United States Government Accountability Office (GAO) report on Credit Cards. This GAO study is so interesting, that we will be blogging on it for some time to come. We have put a link to it in our far right side bar under "Who is the GAO?" so you can reference the GAO study at your convenience.

Over the past 25 years, the prevalence and use of credit cards in the United States has grown dramatically. Between 1980 and 2005, the amount that U.S. consumers charged to their cards grew from an estimated $69 billion per year to more than $1.8 trillion, according to one firm that analyzes the card industry. This firm also reports that the number of U.S. credit cards issued to consumers now exceeds 691 million. The increased use of credit cards has contributed to an expansion in household debt, which grew from $59 billion in 1980 to roughly $830 billion by the end of 2005.

What is the significance of that? That seems like a lot of debt load to carry for individuals to have. What are the options? Pay off the credit cards before more interest is accrued. Credit cards carry an average interest rate of 14.64% (1), and credit card issuing banks allow a minimum repayment of between 2% to 4% a month. At that rate, it may take almost 50 years to pay off a $25,000 credit card balance if the borrower pays just the monthly minimum of 2%. In the meantime, banks will receive over $41,122 in interest.

By taking an installment loan from Lending Club, our members can refinance their credit card balance with a 10% loan (2), pay a portion of the principal amount every month and be out of debt after 3 years. This is a more responsible and more economical way of managing personal finances. Food for thought for the weekend!

(1). Federal Reserve G.19 weekly survey of commercial banks and finance companies, 4/6/07
(2) Lending Club loans rates start at 7.45%