Back in June of 2006, I became an official my Prosper borrower when my loan for $3,500 was funded by thirteen Prosper lenders. While I loved the concept of people-to-people lending, I also had to make sure that obtaining a loan through Prosper was worth it. Before listing my loan, I made some rough calculations. For this article, I decided to take a closer look.
Before we get too far into the numbers, I want to point out that I ended up paying off my Prosper loan early. To keep things simple, I am only going to look at how much I would have saved if I took the full three years to pay my loan.
Directly from my Prosper truth in lending agreement, I see that my loan closed at 10.59% resulting in a finance charge of $595.64. Prosper also took their fee ($35) by reducing my total amount financed, so that finance charge is more like $630.64.
My credit card at the time was a little over 13%. We’ll round up to 14% for this example because they did later end up increasing my interest rate to a little over 14%. The payment to this card will be the same as the monthly payment for my Prosper loan ($112.77).
Using the handy calculator at Bankrate.com, I plugged in the numbers and turned them into the graph below.
If I took the full three years to pay off my Prosper loan, it would have saved me $240 in finance charges. That may not seem like a lot. But, there is something else that is important to consider with credit cards. They may raise your interest rate!
For instance, some credit cards have a universal default clause written into your agreement with them. So, if you pay any bill late (not just that credit card bill), you may find yourself with a raised interest rate.
Then sometimes, credit card companies raise their rate across the board or they magically raise your rate, claiming that your debt load is too high. Trusting that a credit card interest rate will stay constant is almost like trusting that kissing a frog will turn it into a prince. You can’t.
Because of the unpredictability with my credit card interest rate, I had to factor that in as well. So I included in the graph below a spot for the same debt balance at a 29% interest rate. That seems to be the max it may increase to (at least that I’ve read for my particular credit card company).
As you can see from the above graph, the total finance charges paid would have ranged between $631 (Prosper loan) and $3,048 (credit card at 29%). I’ll never know for sure exactly how much I would have saved if I took the full three years to pay off my Prosper loan. But I think it is safe to say that I would have saved between $240 and $2,400 by transferring my credit card debt to a Prosper loan.
To me, the savings was worth it
Tricia is the blogger behind Blogging Away Debt. In her blog, she documents her family’s journey to pay off over $37,000 in credit card debt. Part of her debt reduction plan included a loan from Prosper.com. It originated in June of 2006 and was paid in full in October of 2007.