How to use online loans to consolidate your debt

Juggling multiple debts can feel a bit like a circus act—without the elephants. Debt consolidation could simplify your finances. Consolidating could also have the added bonus of reducing your interest rates and monthly payment.

And the icing on the cake? You can consolidate debt online, from the comfort of your sofa. Let's dive in.

What is an online debt consolidation loan—and is it right for you?

A debt consolidation loan is a loan you use to pay off multiple smaller debts. You can apply for a debt consolidation loan online through the lender's website or mobile app.

For example, you could use a $12,000 personal loan to pay off three credit cards with $4,000 balances. This would give you one monthly payment instead of three. Also, personal loans typically have much lower interest rates than credit cards, potentially reducing the total amount you pay in interest.

Consolidation loans can be a great tool, but are they right for you? A consolidation loan could be a good choice if you:

• Have multiple debts. If you have several loans or credit card balances, consolidating them could simplify your bill-paying.

• Struggle to keep track of payments. Consolidating could reduce multiple monthly payments with different due dates to one fixed payment each month.

• Qualify for a lower interest rate. Reducing your interest rate could lower your monthly payments and cost you less in interest fees overall.

How do online debt consolidation loans work?

The specific details will vary by lender, but here's how they generally work:

1. Find an online lender. This could be an online-only bank, or a local bank or credit union. Most lenders let you apply for loans online even if they have physical locations.

2. Check for pre-approval. Some lenders offer pre-approval with a soft credit check to find out if you meet the basic qualifications. This can let you know, without hurting your credit, if you'll likely qualify for the loan you want.

3. Apply for the loan. Fill out the online application. You may need to submit documents like recent pay stubs.

4. Review your offer. If approved, the lender will tell you your interest rate and repayment terms. If the terms are acceptable, you'll accept the loan and complete the paperwork, typically all online.

5. Funds are distributed. Once the loan is finalized, the money will be deposited into your bank account. You can then use it to pay off your other debts. Some lenders will directly pay your other creditors. Allowing them to do this expedites your debt consolidation plan and might even get you a rate discount.

6. Start making loan payments. Make regular monthly payments on the new loan. You'll have the same payment each month, for the number of months you agreed to when you accepted the loan. For example, a five-year loan would be a 60-month repayment.

Why choose an online loan to consolidate debt?

Common reasons people choose an online consolidation loan include: 

• Convenience. You can apply and manage your loan in your pajamas at home.

• Accessibility. You aren't limited to local banks or lenders; you can apply to any bank or lender licensed to operate in your state.

• Speed. Online lenders sometimes process applications faster than traditional banks.

• Potential for lower interest rates. If you have good credit, you might get a lower rate than what you're paying on your existing debts.

• Simplified payments. One monthly payment instead of many makes it easier to keep track.

How to find a legit online debt consolidation loan

Finding a legitimate online debt consolidation loan is crucial to avoid scams. Here are some tips to help you find a trustworthy lender:

• Look at lender reviews. Look for lenders with good reviews and ratings from reliable sources. Websites like the Better Business Bureau (BBB) can provide information about a lender's reputation.

• Read the fine print. Really. Before signing any agreement, read the terms and conditions carefully. Look for hidden fees or unfavorable terms. If there’s something you don’t understand, ask the lender to explain it in plain language.

• Be wary of upfront fees. Lenders often charge fees for making loans, but generally not upfront. Typically, the lender’s fee is deducted from your loan before the money is disbursed to you. You could also choose to pay the loan fees out-of-pocket instead, and receive the full loan amount.

• Avoid no-credit-check lenders. Lenders use credit checks to assess risk. If they aren't checking your credit, they're assuming you're high risk from the start—and charging you a fortune for it.

• Look for transparency. A trustworthy company will be clear about all fees and terms.

• Ask questions. If you have any doubts, contact the lender and ask questions about any part of the loan process that you want explained.

What are the pros and cons of online loans?

Let's also take a look at how online loans compare to traditional in-person bank loans:

Who can qualify for an online debt consolidation loan?

Lenders consider a few factors when deciding if you can get a loan:

• Credit score. A good credit score could help you get better rates. Personal loan lenders’ minimum credit scores change now and then, but it’s typically at least 620 to 660. You might be able to apply for a debt consolidation HELOC with a lower credit score.

• Income. Lenders verify that you have enough income to pay back the loan. This helps them feel confident you can make your payments.

• Debt-to-income ratio (DTI). DTI is your financial obligations compared to your income. It’s easiest to qualify for a new loan when your housing and debt payments don’t use up more than 36% of your pre-tax income. But it’s possible to qualify with a DTI of 50%. 

• Employment history. Lenders want to feel confident about your ability to repay the loan, so they want to see borrowers with a stable work history. 

Don't worry if you don't ace every category. You can find lenders that work with all types of borrowers, including those with lower income or credit scores.

Can I get a debt consolidation loan online without hurting my credit?

Any new credit account is likely to have a small impact on your credit score. When you apply, lenders typically perform a hard credit check, which may cause a small, temporary loss of a few points. 

Before that happens, some lenders offer prequalification using a soft credit check. That allows you to find out potential loan offers without affecting your credit score. It's a way to research options before you formally apply.

The best ways to build and keep good or excellent credit are:

• Keep your old credit lines open. Don't close credit cards after consolidating, as this could hurt your credit score.

• Avoid carrying credit card debt. If you have credit card balances, work on paying them down. 

• Make payments on time. Paying on time is the top factor in building a good credit score.

• Avoid opening new credit accounts. Only apply when you really need to, and avoid new debt while you’re paying off your consolidation loan.

How to apply for a debt consolidation loan online

Applying for a consolidation loan online is fairly simple:

1. Check your credit score. This lets you know where you stand. Your bank or credit card issuer might offer free credit score access. Or use a free credit score website online.

2. List your debts. Figure out how much you owe on each debt and the interest rates for each.

3. Compare lenders. Research different online lenders and compare interest rates, fees, and terms. The advertised interest rates will only be available to people with excellent credit, so it’s a good idea to prequalify or give each lender a call and ask where you stand.

4. Apply online. Complete the application and provide the required information and documents.

5. Wait for a decision. Online loans could be approved as soon as a few minutes, though it may sometimes take a few days.

6. Receive your funds. Get the money and pay off your existing debts. Funding could be as soon as the next business day, or could take longer.

7. Make on-time payments. Stay on top of your new loan payments. Consider setting up automatic payments. 

What if I don’t qualify for an online loan?

If consolidation isn’t the right path for your situation, you’ve got a few options. Here are other strategies that might work for you:

• DIY payoff plan. Getting rid of debt is almost never quick or easy. The more effort you can apply, the faster you’ll reach the finish line. Sometimes, the best thing to do is buckle down, make some temporary sacrifices, and give your debt payoff plan everything you’ve got.

• Talk to your creditors. Speak with your creditors directly to find out if you qualify for a hardship program that may reduce your interest rate or fees.

• Debt relief. Sometimes creditors will accept less than the full amount you owe and forgive the rest. Whether they’ll be willing to do this depends on many factors. Anyone can try to negotiate their own debts. If you don’t want to, you could work with a professional debt resolution company instead.

• Debt management plan (DMP). A nonprofit credit counseling agency can help you create a plan to repay your unsecured debts in three to five years. This plan could include lower interest rates or reduced monthly payments.

What’s next?

The sooner you start, the sooner you'll make progress smashing your debt. Review your incomes and expenses, consider all of your options, then choose the path that makes the most sense for your situation.

Not sure about the best strategy to tackle your debt? Reach out to a debt expert who can help you make the right choice.