Is the Time Ripe to Ditch Your Credit Card and Get a Personal Loan From Alternate Lending Firms?

There would have certainly been times in our lives when we needed extra money. It is quite usual. Unfortunately, most people across the world rely on credit cards to come to their rescue when the situation gets tight as it is the easiest way to spend money that you don’t have (and you don’t have to go to someone to borrow). The problem with credit cards is that they charge higher rates and are good only for short-term debt, i.e., when they are paid off immediately. So do you have other options today?

Yes, there are options - Online Lending Marketplaces. There are many reasons why a loan from an online marketplace is better than credit cards, the primary reason being lower interest rates. Other benefits such as fixed interest fees, fixed terms and debt consolidation augment the rewards associated with alternate lending over traditional credit cards and PLCC cards. Can loans from Lending Club and other such companies replace credit card debt? Yes and No. Yes, if you can plan all of your expenses well in advance, so that your loan is ready when you need it. No, because it requires a major change in behavior. Its not that easy. It will take time. But the good news is shown in the chart below - If you see the chart below, about 19% of these loans are being used to pay credit card debt itself.

Source: Lending Club, Lending Club Reported Loan Purpose

How this is good news for this new-age lending? Perhaps the debt we take on credit cards can be directly addressed by the online marketplace lenders provided they have a real-time loan approvement mechanism in place. As real-time as the time a POS transaction takes. doable? not sure.

Marketplace lending in the US has grown by leaps and bounds in the last couple of years. The future of the industry also looks bright. Initially, alternative lending firms catered to those customers who needed cash but were not eligible for a traditional bank loan because of poor credit profiles. However, of late, firms such as SoFi have extended their product lines to include personal loans of up to US$ 100,000 which seems to have tremendous potential to replace the custom credit cards and PLCCs in the US.

Earlier in mid-February, Social Finance, Inc. announced a new offering of personal loans available to people across 45 states of the US and the District of Columbia. With this solution, SoFi offers borrowers an alternative to high-interest rate credit cards and PLCC cards to reduce existing credit card debt or make a new purchase.

Salient features of the personal loan offered by SoFi:

  • Customers can borrow any amount between US $10,000 and $100,000.

  • The fixed rate of interest starts at 5.5% APR.

  • The loan period can be chosen as per convenience and the process is online.

Similarly, Lending Club in the US also offers loans of up to US$ 35,000 which could be used to replace credit cards. SoFi has already taken the competition to the next level. The CEO of SoFi has already publicly stated, Traditional lenders are their competitors and they want to take their share. The company has also started direct mail campaigns with topics like Why pay high credit card interest rates and monthly payments?