How to Use an Online Loan to Consolidate Your Debt in 2021

Minimum monthly payments may keep you "on track" with your credit cards, but how many months or years will it take to pay off the entire balance that way? If you're still making purchases on credit, you may never get there. Many consumers face this same situation.  

Now add in other debts you may have. The sum of all of these is your total debt. Once you have that, add up your total monthly payments on that debt.

The numbers can be overwhelming, and they will only get worse if you don't do something about your debt situation. That's where online loans can help. Rather than pay interest and fees on multiple accounts, you can combine it all and have just one monthly payment.

What is an online consolidation loan?

An online consolidation loan is where you borrow enough money to pay off all of your existing debt. Once you do that, all you'll need to do is pay the monthly loan payments until the loan is paid off. At that point, you will theoretically be completely out of debt.

The reasoning behind this is that the interest rate on the consolidation loan will be lower than the APRs on existing credit card and loan debt. You'll also have the option of stretching the loan out over several years, bringing down the amount of money you need to put out each month.

Does that sound like a good solution to your debt problems? It can be, but only if you're able to apply some discipline to current spending habits and not use any of your credit cards while you're paying off the online loan. That's the area where many people struggle.

Some types of debt such as mortgages and student loans may also have special legal protections that you lose when consolidating them into a single loan, so be sure to research that as well.

Which accounts can you consolidate with an online loan?

There are online loans that you can get which are specifically for paying off credit cards. The institutions that offer them typically pay your creditors directly and set up autopayments from your checking account so you can make your monthly payments to them.

If you're looking to bundle in an existing personal or auto loan with credit card debt, you may want to look for a straight unsecured personal loan. If you have collateral, such as a home, you can take out a secured loan, but that puts your property at risk if you default on payments.

Debt consolidation versus debt settlement

Debt consolidation doesn't reduce the amount of money that you owe to creditors. It simply transfers that debt to another lender and lowers the interest rate you have to pay on it. You can also choose a longer term for the loan, such as two, three, or five years.

Debt settlement is a negotiation process where a credit counselor works with the credit card companies to lower your balances. If you've fallen behind on payments, your creditors may be willing to "settle" for less. They'll then simply charge off the remaining balance. Both debt consolidation and debt settlement can help you save money on your accumulated debt, but they serve different needs.

Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.

Source: iQuanti, Inc.

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Categories: Personal and Family Finances

Tags: Debt, Loans, Online Loans, Personal Finance