Subprime Debt Consolidation Loans

We are often asked about subprime debt consolidation loans. Subprime is used in reference to loans extended to individuals who have a low credit score; usually below 600. All that is being asked here is ‘what are the options for a debt consolidation loan for people with bad credit’.

There are many different options as some lenders tolerate more risk than others. Lets first go over what is a debt consolidation loan, reasons to get a debt consolidation loan, and what options exist for individuals subprime credit.

What Is A Debt Consolidation Loan

Debt consolidation is a process undertaken by an individual who has several unsecured debts. The goal is to make the payment easier and reduce the interest. You start by securing a loan from a bank or lending institution which is used to pay off the outstanding balance on all debts. By paying off all the smaller debts you now only have one large loan to pay per month.

For those with a high amount of debt, it may be difficult to stay up to date with the monthly payments. This is usually because the individual does not have enough money to both service their debt and pay for their monthly expenses. A debt consolidation loan can help relieve pressure by increasing the pay period and allowing the debtor to pay less per month. While this does provide month to month financial relief it does mean paying more over a longer period. This situation may still be suitable for people who want to get their financial situation in order.

Connector vs Direct Lender

A direct lender is an institution that directly lends to a borrower. They lend only their lending products. The most common example is a Bank or Savings and Loan institution.

A connector is like a broker, they have a business relationship with several lenders and work to match the borrower with the best loan option.

For those seeking a subprime debt consolidation loan using a connector is likely the better option. This is because direct lenders are usually less favorable to those with a subprime credit score.

Splitting Up Loans

Anyone lender may not be comfortable lending a large sum of money to an individual with poor credit. A lender will be much more likely to lend a smaller amount.

For this reason, it may be useful to split one consolidation loan into 2 loans.

What If Not Enough Money Was Offered

Sometimes one’s credit score does not qualify them for the amount of money they are after. In this case, it is best to take what was offered, provided it offers lower interest over a preferable term than other debts. One is better off consolidating at least a portion of their debt while they improve their credit score.

Often, those with a poor credit score do not qualify for a loan with the terms or the quantity that is suitable for them. At this point, the only option left is for one to improve their credit score. Let’s look at the best ways to improve one’s credit.

Lowering Credit Utilization Ratio: Payment history is not the sole determining factor that lenders look at. They look heavily at several other components. One of the major ones being the Credit Utilization Ratio. This metric determines how much of one’s credit they have used. For example, if one’s total extended credit is $1000, and they have used $500, their credit utilization ratio would be 50%.

To lower one’s credit utilization score, paying down balances on debts is the best way. If this cannot be done in a timely fashion, opening up another credit card and keeping it at $0 balance can also help.

While this method can prove effective the individual must exercise discipline, as it can be very tempting to start putting charges on their new credit card.

Lower Income to Debt (DTI) Ratio: Lowering the amount of one’s monthly income being used to service debts is likely to make the individual a more credible loan candidate.

Lenders like to see that people are able to take on new debts.

Consider Balance Transfers For High-Interest Credit Cards: Credit card companies often have promotions that offer 0% interest on transferred balances for 6 to 12 months. This can be a good way to eat into a debt as all the payments will be going towards the principal.

Applying To More Than One Lender: Lenders initially run soft credit checks which do not affect one’s credit. This allows applying at various lenders and see what different lenders offer.

Split Loan Into Multiple Loans: Sometimes lenders are not comfortable with lending to much money to someone with bad credit. A better solution here would be to split up the loan into two separate ones. For example, an individual seeking a $30,000 loan may not be able to secure the entirety of the money. They would have much better success securing two $15,000 loans.

How Much Can One Expect To Borrow: In general, your total debts must not exceed 200% of your yearly gross income. If you earn $25,000 per year before taxes you can borrow $50,000.

The Debt Snowball Method: This is a commonly used debt reduction strategy used by in debt individuals with many different debts. The minimum balance is paid on all debts except for the ones with the smallest balance. All money available to be put towards debt servicing after all minimum balances are paid is put towards eliminating the smallest balance.

Once that balance is paid, the next smallest debt is attacked.

The Debt Avalanche Method: A more aggressive strategy for debt reduction than the debt snowball method. The debt with the highest balance is paid off first instead of the smallest one. Once to largest debt is paid the second-largest debt is attacked. The advantage to this method is the debt that incurs the highest amount of interest is paid first.

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