It is often assumed that using credit cards in your business is more expensive then a peer-to-peer loan. Many small businesses are turning to P2P lenders for funding for lower interest rates.
P2P lending has been on the rise since the economic downturn. It seems that a new company is popping up every other day. Since the P2P lenders operate strictly online, they state they can offer lower terms.
Initially these companies went after higher credit borrowers to minimize their risk. This could have resulted in lower terms in the initial years. We wanted to take a look and see what the current rates are and how they compare.
We took a look at the average loan rate from Lending Club for all 2015 loans for borrowers with a FICO credit score from 699 to 704. Lending Club is the leader in the market place with more than nine billion dollars worth of loans since it was founded in 2007.
In comparison, we viewed the average credit card rates for banks and credit unions. We used a credit score around 700 due to traditional banks and credit unions having higher credit standards.
Using the statistics site NickelSteamroller’s (NSR) Lending Club back testing tool and simply using the filter, we were able to sort loans from Januray 1, 2015 to December 31, 2015.
Lending Club 2015 Average Loan Rate
As you can see, the average rate for loans with credit scores from 699 to 704 was 12.59 percent. This rate does not include the origination points that are charged ranging from 0.99 percent to 6.99 percent.
Bank Credit Card Rates
As of April 3, 2016:
Notice that the average rates were better for two out of the three types of credit cards offered by banks compared to the average rate for Lending Club (12.59 percent). The Rewards Credit Card had a slightly higher rate by 0.04 percent. The survey also compared the traditional bank rates to credit unions.
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Credit Union Credit Card Rates
The rates for credit unions were by far the best. All three of the three types of credit cards offered had a lower average rate than the peer-to-peer lender. The best rate offered by the credit unions platinum credit card was 3.52 percent lower then Lending Club’s average loan rate. How much money does this save you?
Lets take a look at what type of savings this is over a 5-year loan. The payback amount for a $15,000 loan over five years using an amortization calculator is shown below.
The payback amount includes principal and interest.
- Lending Club - $20,289
- Bank Credit Card Platinum - $19,735
- CU Credit Card Platinum - $18,713
Borrowers who qualify for CU credit card platinum would get a savings of $1,576 over 5 years. The savings occurs when credit card payments are calculated to be fully amortizing over the five years.
This is not the case if you pay the monthly minimum payment. According to the minimum payment policies of major credit card issuers monthly payments are one to two percent of the balance, interest and late fees (if applicable) combined.
That would make the minimum monthly payment for the $15,000 loan $150 to $300 for either one of the credit cards used. Let's take a look using the average $225 minimum monthly payment.
Using a credit card calculator we found paying back a minimum of $225/month at 9.07 percent would take 93 months. The total pay back amount would be $20,925. If you paid back only the minimum payment this would not be the better option.
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Our findings suggest that P2P lenders do not have lower interest rates then traditional banks or CU credit cards. Keep in mind that credit cards do not have origination fees. Lending Club charges up to 6.99 percent. With an origination fees that high credit cards are definitely the better option. If a borrower is willing to implement a payment strategy with their credit cards it is to their advantage.
However, this is easier said then done. I can see how only paying the monthly minimum payment can be appealing when cash flow begins to get tight. If the borrower does not stay disciplined in their repayment strategy, credit cards will get expensive.