The basic idea of debt consolidation is to go from many debts to one. So, instead of having to pay five credit cards or so every month, you’ll be able to make one monthly payment — ideally at a lower interest rate that saves you money, too. There are a few ways to go about streamlining debts according to this approach, like using a loan on its own or in conjunction with a debt settlement program.
One major decision you’ll make on your consolidation journey is which debt consolidation company to use. Financial institutions like banks and credit unions offer consolidation loans, but so do a host of online-only lenders. This may leave you wondering: Can online debt consolidation be effective?
Let’s take a closer look at what it means to consolidate debt online and how you can make the most of the process.
Potential Advantages of Online Debt Consolidation
As NerdWallet outlines, the process for applying may look a bit different — with online companies tending to emphasize convenience. Further, it’s common for online lenders to allow potential borrowers to pre-qualify for a loan without triggering a hard inquiry that’ll put a dent in their credit rating. This makes the process of shopping around to compare potential interest rates and loan offerings easier and less detrimental to your credit score.
Another potential advantage of choosing to work with an online lender is the flexibility you’ll encounter in product offerings. A commonly held misconception is that consolidating requires a stellar credit score. While higher credit ratings do allow borrowers to earn more favorable interest rates, there are still loans out there for borrowers with average or even poor credit. As Bankratewrites, online lenders could be more likely to give you the stamp of approval for a bad-credit loan than a traditional brick-and-mortar financial institution.
Potential Drawbacks of Online Debt Consolidation
Determining whether it makes sense to consolidate depends on the total amount you’ll save by doing so — with all factors considered. This is why it’s important to keep in mind some online consolidation loans do carry origination fees ranging from one to eight percent of the total amount.These fees cover things like the cost of applying and checking your credit. It’simportant to factor this cost into the bottom line when you’re comparing different loans. The origination fees you’ll encounter will vary by loan size and credit rating, as well as by lender.
Moreover, online lenders do take credit score heavily into account when setting interest rates — so borrowers with average to low credit may crunch the numbers and find out they’d end up paying more for a loan than they would using do-it-yourself repayment or another method. Annual percentage rates (APR) can vary immensely on these loans, from lower than five percent to upwards of 35 percent.
Choosing the Right Debt Consolidation Company
While there are many good debt consolidation companies online, there are also some scam organizations hoping to make a quick buck on the backs of vulnerable Americans with debt. As WalletHub outlines, consumers have lost millions of dollars to disreputable consolidation companies over the years.
Quality companies will outline their terms and conditions up front, no strings attached. They will have a secure website, as well as a proven track record of helping others. Before you hand over your personal or financial information, do some digging to make sure a company is legitimate.
In addition to vetting the legitimacy of any given firm, shop around to find the most competitive interest rate and loan terms your financial standing will garner.
