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What Is Online Debt Consolidation? A Complete Guide

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In the United States, the total consumer debt balance reached a staggering $14.88 trillion in 2020. That’s an increase of $800 billion from the year before. As a result, the average consumer debt balance also rose to $92,727 from the previous year’s $92,479.

From mortgages to student loans and credit cards, all these make up the high debt balances in the US.

If you have multiple debts yourself, it may be time to consider online debt consolidation. If used properly, this financial product can help simplify debt management and repayment.

To that end, we created this comprehensive online debt consolidation guide. Read on to discover what it is, how it works, and how it can help you pay off your debts.

What Does Online Debt Consolidation Mean?

The term debt consolidation is the act of combining existing debts into one large debt. The debtor, who owes money to creditors, then takes out a new loan to pay those consolidated debts. This new loan is what you call a debt consolidation loan.

Thus, online debt consolidation is the act of taking on a consolidation loan online. The process is entirely web-based, from the application to paying back the new loan.

Who Provides Debt Consolidation Loans Online?

Banks and credit unions offer debt consolidations loans. However, not all of their processes are online.

For example, they may allow you to apply online, but they may ask you to go to their branches to sign the paperwork. Some may also require you to visit their brick-and-mortar office to submit documents.

If you want the entire process to be digital, you can opt to work with an online lender.

Online lenders also go by the name financial technology (fintech) companies. In 2020, they played a massive role in making financial services in the US more accessible. In particular, they helped simplify the US PPP (Paycheck Protection Program).

Online lenders are well-known for their unsecured personal loans. However, many of them now also offer consolidation loans online. SoFi, Upgrade, LendingClub, and Crediesp are some lending platforms offering online debt consolidation.

Why Apply for Debt Consolidation Loans?

Most people who apply for a debt consolidation loan do so to pay off loans with higher interest rates. For one, debt consolidation loans often have an interest rate lower than other loans.

For example, some personal loan lenders charge interest rates as high as 36%. Lenders usually charge such exorbitant rates to borrowers with subprime credit scores. Unfortunately, these are rates also reserved for consumers with a not-so-stellar financial history.

On the other hand, some credit cards can have annual percentage rates (APR) ranging from 14.99% to 23.74%. That’s lower than the highest personal loan rates, but they’re no doubt still expensive. This is especially true for borrowers who carry personal loans and credit card debts.

If you’re one of those consumers, you may be having a hard time paying off your debts. So, if your credit cards and personal loans have rates as high as those, you might want to merge your debts into one loan. A debt consolidation loan with a rate lower than your other loans can help make it easier to pay your debts.

It may also be easier to manage your debts if you only have one “master” loan to pay back. That master loan, in turn, will be your debt consolidation loan. In most cases, you can use such a loan to pay off debts like personal loans, student loans, and credit card debts.

The ultimate goal of a debt consolidation loan is to help you pay off your existing debts. So long as it’s more affordable than your current loans, then it can help you get out of debt sooner.

What Advantages Does an Online Debt Consolidation Loan Offer?

With the current pandemic, it’s best to avoid as much in-person contact with other people as you can. Therein lies the primary advantage that 100% online debt consolidation loans offer. With these, you can rest assured that the entire loan process is virtual.

To begin with, the application for the loan is online. You can also upload all documentary requirements via the internet. Online lenders accept scanned or even photographed documents.

After you send your application and requirements, the online lenders will review them. Then, whether they approve you or not, they will notify you about the status online. You may get this through email or via the lender’s official applicant/borrower portal.

If approved, the lender will ask you to sign the contract, which you can also do online. For example, you can embed your digital signature on PDF or even word documents.

From there, the lender will start making payments toward the loans you consolidated. You, in turn, can pay your debt consolidation loan payments via digital banking. So, no more standing in long lines at banks or payment centers.

What About Potential Drawbacks?

You can’t use online debt consolidation loans for all types of debts. For example, you can’t consolidate secured loans, such as mortgages and auto loans.

Some lenders may also charge higher interest rates on their debt consolidation programs. This usually depends on the borrowers’ credit score and financial history. As such, please be sure that you compare and calculate rates before you sign the dotted line.

Depending on the terms you choose for your debt consolidation loan, you may also end up being in debt longer. For instance, choosing a lower monthly payment often means prolonging the loan’s term. Smaller monthly repayments make it easier to pay back the loan, but it also means you’ll extend your time in debt.

Another thing to note is that the longer the term, the more interest you’ll pay the lender. So, if possible, choose a shorter repayment period that will not make it too hard for you to pay your monthly dues.

Chip Away at Your Debts With the Help of a Consolidation Loan

As you can see, an online debt consolidation loan can be a valuable tool for debt management. Of course, it won’t eliminate your debts, but it can help make your debts easier to pay off.

However, you should avoid taking on new loans while you’re still paying off your existing ones. This way, you can gradually chip away at your balances as you make your way to a debt-free life.

Looking for more financial or lifestyle advice? Browse our most recent news and blog posts for more tips like this then!

 

 

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