How Do You Qualify For A Debt Consolidation Loan?

Knowing how to get a debt consolidation loan and what the alternatives are could put you on a better financial footing and help you achieve longer-term financial goals. To get the best rate and terms, it’s best to follow specific steps. Your credit score will determine whether you’re eligible for a low-interest debt consolidation loan rate or not.

If your credit score is low because of maxed-out credit cards, see if you qualify for debt consolidation with bad credit. You may need to shop around a bit more for a competitive rate, but it could be worth it if your new score takes you out of the bad-credit category.

1. Check your credit score

There are a few ways you can check your credit score. Some banks and credit issuers, like SoFi, allow you to view your score for free if you have an account with the company.

Your credit score carries more weight than any other factor when getting a debt consolidation loan. You’ll typically need a credit score of at least 740 to qualify for a loan with a highly competitive interest rate.

Some lenders offer loans for bad credit, but the annual percentage rate (APR) will likely be higher. Depending on how low your score is, you may need to shop around more to find the best bad credit loan rates.

2. List out your debts and payments

Create a list of all the debt accounts you plan to consolidate — including the amounts you owe, interest rates and minimum monthly payments. Then, add up the balances to determine the loan amount you’ll need to consolidate your debt.

After that, add up all your minimum payment amounts to see how much you’re currently paying every month. This will help you determine if a debt consolidation loan will cost more or less on a monthly basis.

3. Run some debt consolidation scenarios

It’s a good idea to crunch figures ahead of starting the application process. This way, you have an idea of what you can and can’t afford ahead of time. Ultimately, the lender will determine what you qualify for, but seeing how an example might play out can be helpful to set your expectations for what you’ll find.

Use a personal loan calculator to see what kind of payment you’re looking at on the new loan. Try longer terms of five years or more for lower payments. Shorter terms of three years or less will save you money on total interest.

For example, compare $10,000 of minimum credit card payments against two consolidation loan terms. Paying slightly more each month will save thousands of dollars in interest and cut years out of the repayment schedule.

4. Compare lenders

When comparing debt consolidation lenders, consider the APRs, fees and any other perks they offer borrowers. Bankrate is a good place to start since it can help you compare multiple lenders at once.

You may also want to check with your current bank or credit union if it offers personal loans for debt consolidation. Compare your financial institution’s rates and terms to those offered by other top lenders.

Utilize resources like CFPB’s complaint database, Trustpilot and the Better Business Bureau to determine whether a lender is reputable.

5. Apply for the loan

Prepare the necessary documentation that the lender requires before starting the full application. Although this varies by lender, you’ll typically need to provide the following:

• Proof of income. W-2s, 1099s, pay stubs or tax returns.
• Proof of identity. Driver’s license, state-issued ID, passport or other official ID.
• Proof of address. Utility bill, lease or rental agreement, bank or credit card statement or voter registration card.
• Proof of banking account. Many lenders use a read-only access system, like Plaid, to connect to the bank you want your loan funds deposited into. They may also use this as a way to verify your income through direct deposits.

Once you have your documents handy, submit the loan application. Many lenders allow you to apply online, receive a quick decision and upload the supporting documents to issue final approval. But if you’re applying with a traditional bank or credit union, you may be required to visit a physical branch to apply, and it could take longer to receive a lending decision.

6. Close the loan and make payments

Upon approval, review and clarify the loan terms. The lender will process the file for closing and disburse the loan proceeds to your bank account directly. Unless you choose a debt consolidation lender that pays your creditors directly, you’ll need to pay each creditor with the funds you receive.

Keep making your scheduled payments until each of your creditors shows a zero-dollar statement balance. You’re still responsible for regular payments until the balance is paid in full.

Alternatives to debt consolidation loans

There are also a number of alternatives to debt consolidation loans you can consider before applying.

• Rebalance your budget. Track your spending for a few weeks and see if you can reduce some costs and use the savings toward debt repayment. Consider trimming down on subscription services or switching to a cheaper internet or cell phone plan.
• See if you can change bill due dates. If you’ve had some near-misses on monthly payments because of random due dates, ask the creditor if you can change the due date so it matches most of your other bills.
• Use a balance transfer credit card. Qualifying for a balance transfer card with a 0% introductory rate allows you to consolidate all of your credit card balances into one account, leading to faster payoff and savings on interest — as long as you pay the balance before the promotional period ends.
• Home equity loan. If you’re a homeowner, you can borrow against the equity you have in your property, often at a lower rate than you’d pay on a debt consolidation loan. You can also spread the payment out over 30 years, which may help reduce payments. However, a major disadvantage of a home equity loan is that if you default, the lender can foreclose on your home.
• Seek third-party help. If you have a significant amount of debt — over $10,000 — consider seeking help from a credit counseling agency or debt relief company. Either could help you consolidate your debt and negotiate with your creditors to get you more favorable terms, though you may find a nonprofit credit counselor to be more cost-effective.
• Savings. Tapping your savings to pay more than the minimum monthly payment on your debt can also help you get out of debt faster and save money on interest charges. If that drains your emergency savings, consider splitting up your debt pay down with some savings and a smaller debt consolidation loan.

If you’re in a position where you need to consolidate debt, it’s important to honestly examine how you’re spending money. If the swipe-and-go ease of credit cards is an ongoing issue, stow them away after your debt consolidation pays them off. Otherwise, you’re likely to end up with multiple personal loans, which could add even more strain to your budget and cause additional credit damage.

Bottom line

Getting a debt consolidation loan is a relatively easy process if you have a solid job and a fair credit score. You’ll boost your approval odds if you’ve taken some basic steps ahead of time to make sure you qualify for a personal loan.

Make sure your budget is ready for a regular fixed monthly payment. There is no minimum payment option with a personal loan. Pick the shortest term you can afford so you’re debt-free faster.

If your credit score jumps a bunch, you can refinance your personal loan to a lower rate in the future — typically with no prepayment penalties of any kind. A debt consolidation loan could be a great step in the right direction to ditching overwhelming credit card debt.