If you are like many struggling homeowners who have found that unsecured debts are a major contributing factor to your inability to pay minimum payments, then you have probably considered debt consolidation loans. The problem you are likely to face is that traditional banks will not provide loans at a reasonable interest rate even if you qualify for funds. If you have turned from traditional lenders and are not considering peer to peer lending, then you need to understand how the system works.
Peer to Peer Lending Basics:
Peer to peer, or P2P, lending solution differs from traditional banks and other lending institutions. You are not borrowing from an institution but rather from an individual investor or a group of investors who are pitching in to help provide you with the needed funds.
In P2P lending, you, as the borrower, are able to state the interest rate that you want to pay and the amount of the loan you need. You are also able to suggest a loan term of one, three or five years.
While this might sound like a great situation, the problem arises when it comes to finding an investor who is willing to offer funds. If you do not offer a reasonable interest rate based on your FICO score, then many investors will not provide the funds you need for consolidation.
Depending on the peer to peer lending company, the ability to qualify for the loan is another factor to consider. Despite the advertisement that it is easier to get a loan through P2P options, the company still runs credit score and history reports. In many cases, the company will also perform underwriting reports that help determine the risk that you might default on the loan.
The underwriting will either result in a classification as a high risk that requires taking a higher interest than you are willing to pay or a disqualification for the loan, depending on the particular situation.
Debt Consolidation And The High Interest Rate Conundrum:
A high interest loan is usually not appropriate for consolidation. Unfortunately, the peer to peer lending has a problem because you are likely to face high interest charges. In many cases, you will find that a low credit rating or a high debt to income ratio will result in a high risk classification.
The high risk classification will often dictate the interest rate. In many situations, you can end up paying as much as 30 to 35 percent on the loan if you want a term of five years. Even a loan for one year, which is generally classified as less risky due to the short time period, will often end up with 20 to 25 percent interest if you are considered a high risk individual.
The high interest required for those who are considered at a higher risk of default results in a conundrum when your goal is consolidation. Unsecured debts like credit cards, personal loans and medical bills that are hard to pay each month might end up with a higher interest rate if you are not careful in the loan selection.
Loan Vs. Negotiation:
In most situations, peer to peer lending for debt consolidation is not an appropriate way to handle your unsecured loans and other debts. The problem is that the lender is an investor and the likelihood of getting a reasonable interest rate for consolidation is very low.
The fact that your goal is consolidation will result in a high risk classification. Consolidation loans are often used when the current debts are getting hard to manage. As a result, you are displaying that you have a problem with your finances and the lenders will either require a high interest or will not provide the funds. As private investors, the lenders can pick and choose the loans they want to provide.
Negotiation to consolidate and settle an account is better because it does not require a good credit rating and is not dependent upon individual preferences for whether to provide the funds or not. Negotiation does not require taking out a new loan because it works with your creditors.
In debt negotiation, you have a professional who is explaining your situation and asking the creditor to reduce interest and cut back on the amount owed. By doing this, you will end up saving money and ultimately eliminate your debts within 24 to 48 months without added complications or new loans to worry about. In most situations, negotiation for consolidating debts is a better solution.
Peer to peer lending has a purpose, but it is not a good idea for debt consolidation. The high interest and the risk that you will not get a loan is too high to solve the problem. If you want to learn more about negotiation services, fill out the form or call us today.