Debt Consolidation Loans Are Empowering Financial Futures

January 13 , 2021

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A global pandemic and an economic recession have left many consumers looking for ways to better secure their fiscal futures to weather the storm. For many of these consumers, debt consolidation and emergency relief funds are a clear priority. 

With millions of Americans losing employment in 2020 due to COVID-19 reductions, banks are taking notice. Many of these financial institutions are aiming to assist their consumers during these uncertain times in unprecedented ways.

A recent study by Bankrate examined responses from more than 160,000 Americans seeking prequalification on a personal loan in the first quarter of 2020. What they found that was driving these loan applications was compelling.

38% of those surveyed stated that debt consolidation was the intended use-of-funds for their personal loan application, 15 percentage points more than the next most popular reason, emergency expenses, at 23%. With many consumers taking advantage of low interest rates to consolidate their debt, banks are starting to take notice while attempting to fend off FinTech challengers like LendingClub, Upgrade, SoFi, and Marcus. These FinTech leaders provide digital-first consumer experiences and command a large portion of the market. 

So, how will these banks fill this consumer demand in a time of such great need? More importantly, what is the impact on the consumer? Banks must respond to the demand from consumers to pay off their existing debts directly through one unsecured installment loan — all in an omnichannel digital environment.

What is a debt consolidation loan?

Debt consolidation loans combine multiple balances from credit cards and other loans into a single loan with a fixed rate and term. This type of unsecured installment loan is especially useful for managing revolving lines-of-credit and high-cost loans that incur steep interest fees.

Debt consolidation loan funds are locked in for specific usage and will be disbursed directly to a consumer’s verified creditor accounts on behalf of consumers. The certainty of use-of-funds for these loans is very appealing for banks to maintain a healthy loan portfolio with manageable risk levels.

How do debt consolidation loans work?

Applying for a debt consolidation loan consists of two phases: account opening and verification, followed by direct payoff.

In the account opening and verifications phase, if a consumer selects debt consolidation as their loan purpose in the application process, they will be required  to allocate a fixed percentage of their loan funds for direct debt payoff to their creditors. Upon providing the required information to apply,  a pre-approved loan offer is extended to qualified consumers and their application is verified by the lender.

loan-origination-process

In the direct payoff phase, a consumer provides their creditor information on all of their selected debt balances. Once the consumer verifies their payoff information by connecting to each creditor account and meets the minimum payoff amount to qualify for direct debt payoff, the loan funds will be directly disbursed to their verified creditor accounts. Any remaining loan funds that are not paid directly to creditors  will be deposited into the consumer's preferred bank account. 

direct-debt-payoff-process

How do debt consolidation loans differ from personal loans?

While debt consolidation loans are categorized by many as a personal loan, there are a few key distinctions that benefit both the consumer and the lender.

Higher chance of credit approval 

Debt consolidation loans do not stack debt, thus it does not increase the loan recipient’s debt-to-income (DTI) ratio. This goes a long way in helping to improve their overall credit profile and increases the chances that they are approved for the loan. 

Flexible debt selection 

Consumers possess the autonomy to select which associated debts they want to pay off — whether it is singular debt, multiple debts, credit bureau debt, or non-bureau debts

Single loan management

Debt consolidation loans allow consumers to aggregate multiple debts, with different rates and terms, into one manageable loan with a fixed rate and term. Consumers can potentially save money by reducing their aggregate interest rates and the loan repayment period, if applicable. 

Seamless payoff process 

Once a debt consolidation loan is successfully issued, the funds originated will be disbursed directly to the recipient’s verified creditor accounts. The loan recipient will be able to track the repayment process to their verified creditors, assuring the debts are consolidated to the new loan. 

What to look for in debt consolidation loans

There are a few things to keep in mind while evaluating debt consolidation loans:

Digital user experience 

Choosing to consolidate your debt digitally is not only easier, but also faster. The digital user experience allows you to easily manage the process from start to finish, while also giving you the ability to track payments and funds anytime, anywhere.

Convenient terms and fair rates

When researching your options, it’s important to do your due diligence in comparing the terms and the rates each provider has to offer. Choose terms that fit your lifestyle and rates that align with your budget. 

Direct debt payoff programs

Unlike standard unsecured personal loans where funds are deposited directly into the consumer’s account to pay creditors themselves, direct debt payoff disburses funds to the consumer’s verified lender accounts. Direct debt payoff programs take a step out of the process, making debt payoff that much simpler. 

Learn more about direct debt payoff.

Footnotes

The information in this post is provided for informational and advertising purposes only. Amount's service may vary for each customer. For more information, email us – media@amount.com.

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Allison Chaang

Originally from Malaysia, Allison is passionate about new product development and innovations in the FinTech space. With a growth-oriented mindset, she hopes to continue seeking opportunities to strategically bring new products to market for Amount as part of the Product Strategy team.

Debt Consolidation Loans Are Empowering Financial Futures

Posted by Allison Chaang on January 13 , 2021
Allison Chaang

A global pandemic and an economic recession have left many consumers looking for ways to better secure their fiscal futures to weather the storm. For many of these consumers, debt consolidation and emergency relief funds are a clear priority. 

With millions of Americans losing employment in 2020 due to COVID-19 reductions, banks are taking notice. Many of these financial institutions are aiming to assist their consumers during these uncertain times in unprecedented ways. Consumers have made it clear where the demand is.

A recent study by Bankrate examined responses from more than 160,000 Americans seeking prequalification on a personal loan in the first quarter of 2020. What they found that was driving these loan applications was compelling.

38% of those surveyed stated that debt consolidation was the intended use-of-funds for their personal loan application, 15 percentage points more than the next most popular reason, emergency expenses, at 23%. With many consumers taking advantage of low interest rates to consolidate their debt, banks are starting to take notice while attempting to fend off FinTech challengers like LendingClub, Upgrade, SoFi, and Marcus. These FinTech leaders provide digital-first consumer experiences and command a large portion of the market. 

So, how will these banks fill this consumer demand in a time of such great need? More importantly, what is the impact on the consumer? Banks must respond to the demand from consumers to pay off their existing debts directly through one unsecured installment loan — all in an omnichannel digital environment. This is leading to a strong consumer market for debt consolidation.

What is a debt consolidation loan?

Debt consolidation loans combine multiple balances from credit cards and other loans into a single loan with a fixed rate and term. This type of unsecured installment loan is especially useful for managing revolving lines-of-credit and high-cost loans that incur steep interest fees such as general credit cards, co-branded retail credit cards, and payday loans. 

Funds that originate from a debt consolidation loan are locked in for specific usage and will be disbursed directly to a consumer’s verified creditor accounts on behalf of consumers. The certainty of use-of-funds for these debt consolidation loans is very appealing for banks and financial institutions to maintain a healthy loan portfolio with manageable risk levels.

How do debt consolidation loans work?

Applying for a debt consolidation loan consists of two phases: account opening and verification, followed by direct payoff.

In the account opening and verifications phase, if a consumer selects debt consolidation as their loan purpose in the application process, they will be required  to allocate a fixed percentage of their loan funds for direct debt payoff to their creditors. Upon providing the required information to apply,  a pre-approved loan offer is extended to qualified consumers and their application is verified by the lender.

loan-origination-process

In the direct payoff phase, a consumer provides their creditor information (billing zip, payoff amount, and account or card information) on all of their selected debt balances. Once the consumer verifies their payoff information by connecting to each creditor account and meets the minimum payoff amount to qualify for direct debt payoff, the loan funds will be directly disbursed to their verified creditor accounts. Any remaining loan funds that are not paid directly to creditors  will be deposited into the consumer's preferred bank account. 

direct-debt-payoff-process

How do debt consolidation loans differ from personal loans?

While debt consolidation loans are categorized by many as a personal loan, there are a few key distinctions that benefit both the consumer and the lender.

Higher chance of credit approval 

Debt consolidation loans do not stack debt, thus it does not increase the loan recipient’s debt-to-income (DTI) ratio. This goes a long way in helping to improve their overall credit profile and increases the chances that they are approved for the loan. 

Flexible debt selection 

Consumers possess the autonomy to select which associated debts they want to pay off — whether it is singular debt, multiple debts, credit bureau debt, or non-bureau debts

Single loan management

Debt consolidation loans allow consumers to aggregate multiple debts, with different rates and terms, into one manageable loan with a fixed rate and term. Consumers can potentially save money by reducing their aggregate interest rates and the loan repayment period, if applicable. 

Seamless payoff process 

Once a debt consolidation loan is successfully issued, the funds originated will be disbursed directly to the recipient’s verified creditor accounts. The loan recipient will be able to track the repayment process to their verified creditors, assuring the debts are consolidated to the new loan. 

What to look for in debt consolidation loans

There are a few things to keep in mind while evaluating debt consolidation loans:

Digital user experience 

Choosing to consolidate your debt digitally is not only easier, but also faster. The digital user experience allows you to easily manage the process from start to finish, while also giving you the ability to track payments and funds anytime, anywhere.

Convenient terms and fair rates

When researching your options, it’s important to do your due diligence in comparing the terms and the rates each provider has to offer. Choose terms that fit your lifestyle and rates that align with your budget. 

Direct debt payoff programs

Unlike standard unsecured personal loans where funds are deposited directly into the consumer’s account to pay creditors themselves, direct debt payoff disburses funds to the consumer’s verified lender accounts. Direct debt payoff programs take a step out of the process, making debt payoff that much simpler. 

Learn more about direct debt payoff.

Topics: Lending