How To Get A Debt Consolidation Loan In 5 Steps (2024)

If you’re paying off high-interest debt—especially credit card debt—you may be familiar with debt consolidation loans. You can use a debt consolidation loan to save money, get out of debt sooner, or lower your monthly payment, but only if you know how to get approved for a debt consolidation loan. We’ll help you figure it out with this five-step process.

1. Check Your Credit Score

Your chances of getting a debt consolidation loan that works for you are better if you have a good credit score, usually defined as 670 or above by FICO. Generally, the higher your credit score, the better your chances of qualifying for a loan.

In some cases, your credit report may have errors, so first you’ll want to check your credit report to make sure everything is correct. Your credit history shown on your credit report helps make up your final credit score. What’s more, you’ll want to check your credit score in addition to your report. Several credit card issuers let you check your score for free.

If your credit score could use some work, see what you can do to fix it. While improving your credit can take some time, there are some quick ways to fix your score. If you can wait to apply for a consolidation loan until your score is better, that’s almost always a better option.

2. Make a Debt Consolidation Plan

Before you apply for a debt consolidation loan, it’s important to know what you want to get out of it. Obviously, you’re looking to simplify your debt payments by combining them into one loan. But here are some other common reasons people apply, along with what type of loan you should look for in that case:

• You want to save money: Look for a loan with a lower rate so that more of your payment goes toward paying down the balance each month instead of the interest.
• You want to get out of debt sooner: Look for the shortest loan term length with payments you can afford. Of course, you can always pay more toward your debt at any time, but choosing a shorter term length forces you to make those payments.
• You want smaller monthly payments: Choose a longer term length. This will cost you more over the long run, but by spreading your payments out over time, each one will be smaller.

It’s a good idea to use a debt consolidation loan calculator to play around with numbers to see what your options might cost you. For example, if you combined all of your debt into one loan could you afford the monthly payments on a 10-year loan? What about a five-year, or even a three-year loan? How much money would that save you?

3. Find and Compare Debt Consolidation Loans

Now that you have an idea of what you’re looking for, you can target your search for lenders with loans that fit your needs.

Now’s a good time to check your rate and loan terms with as many debt consolidation loan lenders as possible. The more the better, since that’ll boost your odds of finding the best loan for you. There are many rate-shopping sites out there, and you can also check with individual lenders directly, such as credit unions, banks or online lenders. Be sure that each lender does a soft credit pull at first, to protect your credit score from any pitfalls.

4. Apply for Your Loan

Once you find the best lender, it’s time to apply for the loan. Chances are you’ll need to provide additional documents. Your lender can tell you what it needs, but you’ll usually have to supply documents like your most recent pay stub, past tax returns, bank statements or your personal ID, such as a copy of your driver’s license.

Most lenders only take a few minutes to review your application and qualify you, but if they need additional documents, it can take a few days. It’s a good idea to keep an eye out for any emails or phone calls from your lender during this time in case it needs anything. This can speed up the approval process so you can get your answer sooner.

5. Repay Your Loan

If you’ve been approved, congratulations! Now’s a good time to enroll in autopay so you don’t run into any late payment fees or damage your credit from a late payment mark on your credit report.

It’s also a good time to keep yourself from going into debt in the future. Not everyone goes into debt through faults of their own (hello, medical bills and low wages). But if you could do a little better with saving more and spending less, it’s crucial to work on those areas so that you don’t have another pile of debt by the time you pay this loan off.

Tips for Managing Debt Consolidation Loans

It’s one thing to apply and qualify for a debt consolidation loan, it’s another thing to manage that loan responsibly. Here are five tips to help you understand and manage your new loan:

• Understand personal loans: Most debt consolidation loans are personal loans. These are simple, lower-interest loans with a fixed term length. But if you don’t mind a bit more complexity, you could also consider a 0% intro APR credit card, a HELOC or a home equity loan.
• Learn any additional loan features: Besides the APR, it’s also a good idea to look at other features lenders might offer. For example, some lenders pay off your old debt for you, so you don’t have to do that step yourself.
• Continue paying your old loan until it’s clear: Once you or your new lender pays off your old debt, wait until you hear from your old lender that you have a zero balance. Payments might take a few days to process, after all. If you accidentally overpay, you’ll get the money back.
• Set up autopay: Managing your loan is a lot easier when you enroll in autopay. This will ensure that you never miss a payment, leaving you free of late payment penalties, such as fees or negative marks on your credit report

Benefits of Debt Consolidation

Consolidating your debt means merging multiple individual loans and credit card balances into one single loan. Some of the benefits include:

1. Streamlining payments. Consolidating your loans can help streamline the repayment process. Instead of being responsible for several different payments every month, you will only have to make one payment to a single lender.
2. Secure a lower interest rate. Borrowers who have improved their credit score since they applied for their original loans may be able to get a lower interest rate on their newly consolidated debt. This reduces the total interest paid over the life of the loan.
3. Lowering your monthly payment. When you apply for a debt consolidation loan, you may receive different terms than your original loan. Some borrowers want to reduce their monthly payment, which would mean applying for a loan with a longer term, such as five versus three years. However, doing so often means owing more interest overall.

Debt Consolidation vs. Debt Relief

While debt consolidation lets borrowers refinance multiple loans into one, debt relief is generally available for borrowers who are struggling to afford their loan payments. The goal of debt relief is to cancel or forgive all or some of your debt or slow or stop your debt’s growth. This is typically done by working with debt settlement companies, credit counselors or nonprofits.

Frequently Asked Questions (FAQs)