If you are struggling to pay off high unsecured debts, then you have probably looked for a solution that will make payments a little easier. Social lending, which is also called peer to peer lending, is a solution you might consider when looking into debt consolidation solutions. Before you determine that social lending will help, you need to understand what it is and the potential problems you might face when seeking a loan for consolidation.
What Social Lending Is:
Social lending is a very specific type of non-traditional lending service. Instead of receiving funds from a bank or traditional lender, you are giving money from a private investor or a group of investors.
In social lending, you are able to request a loan for a particular interest rate. While this can sometimes go through, it is important to keep in mind that it does not always work out as you might hope. The lending company that connects investors to borrowers will still run the basic credit report to determine a fair interest based on the risk that you are unable to pay the loan.
The likelihood that you can fully repay the loan is the key element to determining if you are eligible for the loan. If the risk is considered high, you will either find your loan request rejected or you will see that the underwriters issue a different interest rate for your loan.
Social lending is not a traditional lending solution, so it can help if you have faced rejection for consolidation loans or you were provided an unreasonably high interest rate. The downside is that it might not always help your particular situation if you are considered a high risk individual.
High Risk Determination:
The determination that an individual is considered a high risk depends on the particular social lending venue. If you are working with a social lending service that has underwriters involved, then you can expect to have a similar determination as the bank. Some social lending solutions will allow investors to make the determination based on the information provided, so it will depend on the particular situation.
In most cases, the key element that determines risk is the credit history information. If you have a low credit score, which is a possibility if you are already struggling with minimum payments on unsecured debts, you can expect to receive a higher risk rating.
The risk rating is not only about the figures, which play a key role, but also the most updated information and your current debt to income ratio. Consolidation loans will require having a good credit rating and a reasonably moderate amount of available credit available.
If you have a relatively high credit score but your recent credit history report shows missed or late payments for a few months in a row, you can expect a higher risk rating. This means that you might still find that your risk is classified higher than expected based on your current credit history information.
A high debt to income ratio is another key element of determining the affordability of your loan. If you have a mortgage, student loans and a wide range of unsecured debts that have monthly payments totaling around 1/3 of your monthly income, you can expect a very high risk rating. A high debt to income ratio means that you will struggle to make payments.
Costs of High Risk:
A high risk rating means that you are likely to have a high interest rate as well. While social lending does allow you to make a request for interest rates, you might not qualify based on the risk rating.
A medium to high risk rating will often result in paying around 20 to 36 percent in social lending. The particular interest rate will vary based on your situation, but if you are classified between medium and high risk, your interest rate is not likely to reduce your monthly costs if you use a loan for consolidation.
Debt Consolidation:
If your goal is consolidating to bring down your monthly payments and ultimately reduce how much you pay to the lenders, negotiation via a debt relief company is usually a better solution.
Negotiation requires talking to the creditor and making a request for a lower monthly payment. If you opt to settle the account as well, you will end up paying a much lower amount on your principle and will end up with the ability to recover financially within a shorter time period.
Struggling with unsecured debt does not mean turning to a loan for help. A new loan will not help the situation and often makes it worse within a few months. If you are looking for debt relief services that will help, call us today or fill out the form to obtain a free debt analysis.