Pros and cons of using social lending for consolidation

It can be a good choice for retiring credit card debt, but has drawbacks

Credit card balance transfers
Think a social lending loan may be for you? Read on to find out the pros and cons of this lending and borrowing tool.


  • Lower interest rates than credit cards and banks. Most social lending sites are run online, and most of the risk is borne by outside lenders. Thaft generally means lower risk for them -- and lower interest rates for borrowers.
  • Fixed-rate loans. While some sites, such as Zopa, offer ways for borrowers to lower their interest rates during the course of the loan, you'll almost always find that the interest rate you get initially is the one you'll have for the life of your loan.
  • Your story -- and friends -- can help you improve your interest rate. If you're familiar with social networking sites such as LinkedIn, you know that your online reputation is valuable. For social lending sites, that reputation can mean savings, says Prosper's founder, Chris Larsen. "Inviting friends to get on your loan and give a recommendation -- even if it's only 1 percent of your request -- can have a dramatic impact," he says. "It can lower your rate and increase the likelihood of the loan being funded."
  • It's an unsecured loan. Miss payments on a home equity line of credit and you stand to lose your house. Miss payments on a loan through a social lending site and you may face hassles, creditors, and a lower credit score, but you won't lose the roof over your head.
  • Loan payments are deducted automatically. If you're prone to paying late, the automatic payment feature for most social lending sites will help ensure that your loan is paid off in a timely way.


  • The whole world may know your plight. Though you're generally not required to share too many details about why you want the loan, photos, stories, and details may help you attract lenders. Perfect strangers -- and your neighbor next door -- will be privy to much of the information you provide. "The most important thing is for people to be as realistic, straightforward, and honest as possible," says Dolton. If you're looking for privacy, a bank loan may be a better bet.
  • There are privacy risks. Well-vetted sites such as Prosper and Zopa may have few risks, but it's wise to do your homework before you start offering your stats, says finance professor Roy Wiggins III of Bentley College in Waltham, Mass. "Anytime you're offering information -- whether it's financial information or your Social Security number -- you have to be careful with whom you're sharing that data," he says. "You want to deal with formal, institutionalized groups -- not pure, freeform social network groups."
  • Not everyone will be funded. Most social lenders require a minimum credit score (generally between 540 and 650) before you will be considered for a loan. Even if you meet the standards, if not enough lenders bid on your loan, you won't get the cash.

See related: More take social lending route to consolidate debt 

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Updated: 01-19-2018