How to get a debt consolidation loan in 5 steps
Here is how to get a debt consolidation loan in five steps.
1. Check your credit score
Start by checking your credit score. A bad credit score (300 to 629 on the FICO scale) may not disqualify you from all loans, but consumers with a good to excellent credit score (690 to 850 FICO) are more likely to get approval and get a low interest rate.
Ideally, the new debt consolidation loan has a lower rate than the combined interest rate on your other debts. A lower rate reduces the overall cost of your debt and shortens the repayment period.
If you don’t need the loan right away, take the time to build your credit to benefit from a reduced rate loan. Here’s how:
Catch up on late payments. Late payments are reported to the credit bureaus after 30 days of late payment, which can lower your credit rating by 100 points or more. If you are within the 30 day window for a debt payment, there is still time to submit it.
Check for credit report errors. Errors on your credit report, such as payments applied to bad debt or accounts incorrectly marked as closed, could hurt your score. Check your credit reports for free at AnnualCreditReport.com and dispute any errors you find.
Pay off small debts. Debts owed represent 30% of your credit score. If you can, pay off all high interest credit cards before you consolidate. It will improve your debt to income ratio, which can help you get a lower rate on the consolidation loan.
2. List your debts and payments
Make a list of the debts you want to consolidate – credit cards, store credit cards, payday loans, and other high interest debts – and add up the total amount owed. You will want the amount of your debt consolidation loan to cover the sum of those debts.
Add up the amount you pay each month for your debts and check your budget for any spending adjustments needed to continue debt repayments. The new loan should have a lower rate and a monthly payment that fits your budget. Commit to a repayment plan within your budget.
Debt Consolidation Calculator
Use the debt consolidation calculator below to see if it makes sense to consolidate. After entering your debts, you will see typical lender rates and the potential savings if you consolidated at a lower rate.
Shop around for a loan that’s right for you. Online lenders, credit unions, and banks all offer personal debt consolidation loans.
Online lenders cater to borrowers with all ranges of credit, although loans can be expensive for those with bad credit. Most online lenders allow you to pre-qualify so that you can compare personalized rates and terms without impacting your credit score.
bank loans work best for those with good credit, and customers with an existing banking relationship may qualify for a rate reduction.
Look for lenders who offer direct payment to creditors, which simplifies the consolidation process. After the loan closes, the lender sends the proceeds of your loan to your creditors at no additional cost.
Consider other features that some lenders offer, like reporting payments to the three major credit bureaus, flexible payment options, and financial education.
When you are ready to apply for the loan, gather documents such as proof of identity, proof of address and income verification.
Take the time to read the fine print of the loan document. Additional fees, prepayment penalties, and having the lender report payments to the credit bureaus can affect your credit score as well as the total cost of the loan.
If you don’t meet the lender’s requirements, consider adding a co-signer with good credit at your request. This can help you get a loan that you would not qualify for on your own.
5. Close the loan and make the payments
Now that you have found and approved the loan you want, there is one important step left for you.
If the lender offers direct payment, they will pay your loan proceeds to your creditors, paying off your old debts. Check your accounts for a zero balance or call each creditor to make sure the accounts are paid off.
If the lender does not pay your creditors, you will pay off each debt with the money deposited in your bank account. Do this right away to avoid additional interest on your old debt and to eliminate the temptation to spend the loan money on something else.
Finally, within 30 days of receiving the debt consolidation loan, make your first payment.
Which lender is right for me?
NerdWallet has reviewed over 30 lenders to help you choose the right one for you. Below is a list of lenders who offer the best debt consolidation loans.