Money Research Collective’s editorial team solely created this content. Opinions are their own, but compensation and in-depth research determine where and how companies may appear. Many featured companies advertise with us. How we make money.
How to Get a Debt Consolidation Loan
By Quinlan Grim MONEY RESEARCH COLLECTIVE
A debt consolidation loan can make it easier to pay off your debts and improve your credit score. These loans are available to people over 18 who have fair or good credit and want to pay off their debts faster.
Is a debt consolidation loan right for you? This guide will cover the ins and outs of debt consolidation to help you decide if it’s the best way to pay off your debt.
What is a debt consolidation loan?
A debt consolidation loan is a personal loan that helps you pay off high-interest debt. By consolidating debt into one loan, you can schedule simple monthly payments and reduce your risk of accumulating interest from multiple creditors.
Debt consolidation loans are offered by credit unions, online banks and other financial institutions. They come with strict repayment terms and can generally be paid off in two to seven years. You might be interested in applying for a debt consolidation loan if you:
- Have high-interest debt: The average interest rate for a personal loan is a little under 10%. You might save money by consolidating your debt if you have credit card debt with a higher interest rate.
- Have a fair or good credit score: You’ll get the best rates for your debt consolidation loan if you already have good credit (ideally over 670). It is possible to get debt consolidation with poor credit, but your loan will likely have a high annual percentage rate (APR).
- Can stick to a monthly payment schedule: To pay off your debt consolidation loan successfully, you’ll have to stick to a strict payment plan. These loans are best for someone with a steady income source and who can make each loan payment.
How a debt consolidation loan works
Debt consolidation loans combine your high-interest debt from multiple creditors into a single loan. Although you’re taking on another loan, you aren’t taking on more debt — you’re consolidating debt. Every payment you make toward your debt consolidation loan goes toward paying off all your debts.
With a debt consolidation loan, you won’t have to deal with multiple creditors. Your lender will pay the creditors on your behalf. That doesn’t mean your debts are absolved as soon as you take out the loan. You still must pay the full loan amount within the pre-set period for your debts to be considered paid.
You’ll have to apply for a debt consolidation loan with a lender. Choose the best lender for your situation and make sure you meet their criteria. Once you’re approved for a loan, you can make monthly payments and pay off your debt within the pre-set term.
Qualification criteria
Every lender has different qualification criteria for a debt consolidation loan. Like other personal loans, debt consolidation is available to people who aren’t considered “high-risk borrowers.” A few factors your lender might consider include:
- Your credit score: A credit score of 600 or higher may be needed to take out a debt consolidation loan. Some lenders require a “good” credit rating, which is over 670.
- Your credit history: In addition to your credit score, your lender may look into your credit history to see that you are capable of paying back a loan in full.
- Your debt-to-income ratio: Do you earn enough to make your monthly payments? If your income is too low to make the monthly payments required by your debt consolidation loan, you might not be approved.
Loan amounts
A typical debt consolidation loan can be anywhere from $1,000 to $50,000. The total loan amount should encompass all your high-interest debt. If you apply for a debt consolidation loan online, your lender should give you a free pre-approval offer showing the loan amount and terms before you move forward.
The best debt consolidation loans offer a full range of loan amounts to meet your needs. The interest rate and payment schedule for your loan may be affected by the new loan amount, along with the factors listed above.
Repayment terms
When you take out a debt consolidation loan, you agree to set repayment terms. Those terms include the payment schedule, loan amount and APR. Make sure you are clear on all the terms of your loan before you agree to it.
The standard repayment period for a debt consolidation loan is around five years. It could be anywhere from one to seven years or longer, depending on the loan amount. Consider any potential career changes, big expenses or changes in your future income before you accept a long-term repayment plan.
How to apply for a debt consolidation loan
Before you start comparing the best debt consolidation loans, you should know what to expect from the application process. Applying for a credit card debt consolidation loan takes some time and research.
Remember, you’ll most likely be paying for this loan for the next several years, so it’s important to take your time and make the best choice for your finances. Below are four steps to apply for a debt consolidation loan from a credit union, bank or online lender.
Review your credit report
First, look at your credit score to get a better idea of your options. Some lenders only accept applicants with “good” credit.
You can get a free credit report online from a certified site like Experian or Credit Karma. You may want to use multiple sources for the clearest picture of your credit. A full credit report will tell you your FICO score, history, current balances and more. Some sites might also show you what could be affecting your score.
There are ways to improve your credit report and make it more appealing to lenders. You can remove charge-offs and remove collections by disputing them with a credit bureau. But these aren’t quick fixes for a better score — the best way to boost your credit score is by consistently making payments on time and fully repaying loans.
Research lenders and get pre-approval offers
Once you know your credit score, you can start researching lenders. Most online lenders offer quick pre-approval offers so you can compare terms and loan amounts before you make your decision. They might also have a debt consolidation loan calculator to help you pick the right loan terms for your situation.
A few well-reviewed lenders include:
- LightStream
- Fiona
- Discover
- SoFi
- PenFed
These online banks offer fair debt consolidation loan rates and terms. Of course, they aren’t your only options. Be sure to read every lender’s customer reviews and third-party certifications before you get a pre-approval offer.
Read the fine print
A loan agreement is a binding contract. Like with any contract, it’s crucial to read the fine print.
Before you sign your loan agreement, make sure you’re 100% clear on the terms, including late penalties, cancelation options and APR. Some lenders might have hidden fees not stated in your pre-approval offer. You can call the company’s customer service helpline and talk to a live representative about your agreement to ensure you aren’t missing anything.
Apply for the loan that works for you
Pre-approval is not a guarantee that you’ll get that loan. Once you’ve found a loan that has the best terms for your situation, you’ll have to apply. The lender might require additional documents with your application, such as:
- A driver’s license or ID
- A recent pay stub
- Last year’s tax returns
- A current bank statement
It shouldn’t take long for the lender to review your application. Most online lenders offer responses within the same day or even within the same hour. However, it might take longer if they need more documents from you.
Once your loan has been approved, you can start repaying it. Your lender will probably recommend setting up automatic payments so you never miss a payment.
Reasons to consider applying for a debt consolidation loan
What does consolidating debt mean? In many cases, it means a simpler path out of debt. By combining your credit card debt or other high-interest loans into one personal loan, you might have an easier time managing your finances. Let’s break those benefits down in detail.
Making one single payment
A debt consolidation loan can help you avoid missing any payments if you have loans from multiple creditors. You can set up autopay to make a single payment every month. That way, there will be less to keep track of and less risk of forgetting a payment.
The simplicity of a fixed repayment plan
A debt consolidation loan works on a fixed schedule. You’ll pay the same amount every month for a predetermined number of months. As long as you don’t miss your payments, you won’t have to deal with any unexpected fees or penalties.
Getting high-interest debt under control
Debt consolidation is one of the safest ways to get your high-interest debt under control. Other options, like taking out an income loan, declaring bankruptcy or negotiating with debt collectors, can devastate your credit.
With a debt consolidation loan, you can chip away at your debt with one monthly payment. It will help you manage high-interest debts before they get out of control. On top of that, you won’t have to risk tanking your credit score to get out of debt.
Are debt consolidation loans available to borrowers with bad credit?
Finding a debt consolidation loan is possible if you have bad credit. Depending on your credit score, you should be prepared to face higher interest rates and short grace periods for missed payments.
Getting a loan with bad credit can help to improve your credit score in the long run. But when it comes to debt consolidation, it might not be worth it — if you have a credit score of 300-580, the APR for your personal loan could be higher than your high-interest debt, so you’re better off just paying the creditors.
A fair credit debt consolidation loan — for people with credit scores of 601-669 — might be a worthwhile choice if the APR is lower than your high-interest debt. Compare loan terms with lenders that offer pre-approval to find an option that works for you.
In the meantime, you can always work to raise your score by chipping away at your debt and making on-time payments. A debt consolidation loan might be a better choice in the future as you get closer to your goals.
How do debt consolidation loans impact your credit score?
A debt consolidation loan is much safer for your credit than debt settlements or bankruptcy. It can actually improve your credit score in the long run as you make your payments. However, taking out a personal debt consolidation loan can have a few short-term effects on your credit:
- Credit checks: Lenders might run hard checks on your credit to approve your application, which can hurt your score.
- New credit account: Opening a new credit account can temporarily lower your score. As a type of personal loan, debt consolidation is considered a new credit account.
- Age of credit: Older credit accounts with a long history of on-time payments help to build your credit score. Your new loan might lower your score in the short term until you make multiple payments.
If you have a lot of high-interest debt, you shouldn’t let these factors stop you from considering debt consolidation. Paying off the loan will improve your credit in the future despite these temporary setbacks.
When consolidating your debt just makes sense
A low-interest debt consolidation loan from a reputable lender is a safe way to pay off your debt. While it might not be the best solution for everyone, debt consolidation makes sense if you:
- Have high-interest debt with multiple creditors
- Have a good credit score
- Want to simplify your monthly payments
- Want to avoid a debt settlement
If you think debt consolidation is right for you, take some time to compare the best loan offers. With the right loan, you can get your debt under control and build your credit for a stronger financial future.