Lending Club Blog

Debt Consolidation: P2P Loan vs. 0% Balance Transfer

The following is a guest post by DR, the founding blogger of the DoughRoller.net, a personal finance and investing blog. DR is also an investor in LendingClub notes.


When it comes to consolidating debt, you have a lot of options:  from home equity lines of credit to credit card balance transfers to unsecured loans.  These options give consumers with good credit the flexibility to lower their interest payments and reduce the number of loans they have to manage each month.  Two of the more popular debt consolidation options are peer or p2p loans and 0% balance transfer offers.

Recently, readers have been asking which option is best.  At first blush, the balance transfer option may seem like the sure winner.  After all, it’s hard to beat zero interest, right?.  But the reality is that 0% credit card balance transfer offers are very rate nowadays, and if you are lucky to get one, a p2p loan is a much better option in many cases.  As you consider what’s best for your specific financial situation, here are several reasons why a p2p loan can be the better choice:

  1. 0% balance transfers are not free: Back in the day you could find a no fee zero interest balance transfer offer.  Today, those offers are long gone.  Every no interest option now comes with a transfer fee of 3 to 5%.  While these fees still beat the interest rates on most unsecured loans, we ought not think of zero balance transfers as free money.  Combined with other factors listed below, balance transfer fees make these offers less appealing than the marketing hype might suggest.
  2. Watch the “up to” offer: Most balance transfer offers today are advertised as “up to” certain number of months (3, 6, and 12  months being the most common).  The offers use “up to” because the actual duration of the offer will depend on the card issuer’s evaluation of your credit.  In other words, while you may apply for a 12-month offer, you may end up qualifying for just a 6-month offer, or even no balance transfer feature at all.  In contrast, with a p2p loan you know you have either a 3-year or a 5-year term to pay off the loan.
  3. Credit limit: One of the great features of a p2p loan is that you can apply for a specific amount up to $25,000.  With credit cards, it’s kind of like a box of chocolates, you never know what you’re gonna get.  I’ve applied for balance transfer offers in the past and been approved for just $2,500.  That doesn’t exactly help much if you are looking to consolidate a larger amount.  P2P loans are far more predictable.
  4. Fixed Interest Rate: With a p2p loan, the interest rate you pay is fixed for the entire 3-year team of the loan.  This makes your monthly payments predictable, which is a big help when it comes to managing your money.  In contrast, most credit cards come with variable rates.  In the case of balance transfers, variable rates present two issues.  First, when the introductory rate expires, any unpaid portion of the transfer (and all balances from purchases that would have qualified for the 0%) will start accruing interest at the card’s regular APR.  Depending on your credit history, this rate can be significantly higher than what you can get with a p2p loan.  Second, even this higher rate can go up, which is why most credit card rates are described as variable.  The point is, a p2p loan gives you a fixed rate, while most credit cards don’t.
  5. Revolving Credit: A credit card is revolving credit.  This means that you can continually borrow money, repay it, and borrow again so long as you stay under the credit limit.  While revolving credit can be very convenient, it can also prove to be difficult for some to manage.  That’s exactly why credit card debt is such a problem for so many.  With a p2p loan, however, you don’t have the temptation of revolving credit.  What’s the loan is issued, you pay the balance down every month, but can’t increase the balance.  These fixed term loans are ideal for those working to regain control of their finances.
  6. Raise Your Credit Score: Although credit score algorithms are a mystery, it is well known that the more credit cards and revolving credit accounts you have open, the more impacted your credit score gets.   With a p2p personal loan, credit scores will improve as you pay your loan back based on 2 factors: a) the consolidated loans are paid off, and b) your p2p loan payment history is reported to the credit bureaus.

Does this mean that balance transfer offers are bad?  No.  In some cases transferring a balance to a 0% credit card may be a fine approach.  This is particularly true if you plan to pay off the balance in under a year and are confident that your credit history will qualify you for the top offers.  And it may even make sense to combine transfer offers with a p2p loan to consolidate your debts.

But the key is not to be overly swayed by the allure of a 0% offer.   In many cases, a p2p loan with a reasonable, fixed interest rate and 3-year term will offer significant advantages over a balance transfer offer.


The views and opinions expressed in this post are solely from the author and do not  necessarily reflect the views or policies of Lending Club, its management, employees or associated entities.


Thursday, May 27th, 2010 at 7:07 am

Comments (4)

  1. [...] Debt Consolidation: P2P Peer Personal Loan vs. 0% Credit Card
    … [...]

    May 28th, 2010 at 1:27 am

  2. Coreen G:

    I’m still not 100% certain that debt consolidation is the right way
    to go although I’ve been beginning to think a lot more about it.
    Eliminating 50% of my debt would have been a amazing relief of
    pain, but not a responsible way of approaching finances.

    June 9th, 2010 at 1:22 pm

  3. I know many people who have had their credit card interest rates
    “jacked”… the CC companies say that the balance has to be less
    than 50% of the limit before they will bring the interest rate back
    down. The concept of a loan with a lower interest rate, in order to
    pay off the CC, would seem to be a good idea. But at the end of the
    day, the individual still has to have self control. Out of control
    spending is like any addiction – you need to be able to resist
    going back for more.

    June 28th, 2010 at 1:55 am

  4. Malcolm:

    Great info on Debt Consolidation. When looking to consolidate and
    pay off any debt, people should read more from personal finance
    blogs before making any decisions. Then more people would be in a
    more comfortable financial situation. The info is out there and
    most are free, they just have to look!

    August 19th, 2010 at 5:22 pm

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