P2P Loans vs Credit Cards: Which is Better for Financing?

Blue bank credit card on laptop screenThe debate over the future of the financial services industry is underway with the growth of the financial technology sector. The budding industry, known as fintech, has burst onto the global stage. Traditional financial institutions are having difficulty keeping up with the innovative features offered by these young firms. With the growth of the peer-2-peer (P2P) lending market, analysts and investors are now starting to take a close look at existing loan and financing options compared to P2P.

P2P lenders have gained traction among consumers and investors alike. The way these lenders operate is simple enough. Individuals can offer up a certain amount of money, even just a few hundred dollars, and loan that money out to other people who need loans. Each loan that is distributed is made up of smaller loans from different people. The reason this model is so effective is because it opens up the lending market to piles of cash offered by individual investors, rather than just the cash offered by banks. It also strips out the use of middle-men and makes access to loans easy and simple.

Credit cards are a much older and more traditional form of financing. By using a credit card, you’re essentially taking out a small loan with each purchase. You borrow money from a credit card company temporarily, and generally pay back that small loan at the end of the month. Some people have figured out that you can use credit cards to finance things other than just small retail purchases. Many people have used credit cards to finance trips, business startups, medical expenses, education and other important things. But others have noted how dangerous this process can because of interest rate payments.

The P2P industry is still young, but it is quickly gaining traction, whereas credit cards are institutional and are the traditional go-to for consumer financing. For those who are looking for ways to finance a trip, pay for medical expenses, or get funds for another expensive purchase, traditional loans are often times not an option. This leaves P2P and credit cards as the only option left. On the surface, it might appear that P2P is the clear favorite. It’s younger, more exciting, and offers sleek mobile platforms that are easy to use. At the same time, traditional credit card companies are associated with Wall St and have received general mistrust amongst the public. So which option is really better?

Credit Cards vs P2P

One of the reasons the P2P industry has become so popular is because of the relatively low interest rates offered on loans. Online lenders are able to provide lower interest rates due to improved credit score analytics and lower overhead costs. According to Lending Club and Prosper Marketplace, the two biggest P2P lenders, their average interest rates are 13.4 percent and 13.9 percent respectively. According to other research, the average interest rate on credit cards is between 17 percent to 18 percent. Additionally, P2P lenders are generally more lenient with interest rate calculations, with many firms offering grace periods and interest rate deductions for consistent on time payments. Overall, it appears that P2P lenders have the upper hand when it comes to interest rates.

But are interest rates the whole story? Check back Friday for part II…

Posted on May 4, 2016 by in Credit Cards

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