How To Get A Debt Consolidation Loan In 5 Steps – Forbes Advisor

Using a debt consolidation loan to pay off multiple debt balances can simplify repayment while reducing your interest rate. The process for taking out a debt consolidation loan is similar to applying for any other personal loan. Yet taking a few extra preparation steps beforehand can help you lower your interest rate so you can make the most of the loan.

How To Get a Debt Consolidation Loan

1. Prepare Your Finances

When you apply for a debt consolidation loan, the goal is to get a lower interest rate or lower payment to reduce costs.

During the loan application process, lenders review your financial situation to decide what interest rate and loan fees to charge you. The best candidate for an installment loan is someone who has:

• At least fair credit (600 on the FICO Score scale, but 700 or higher gets you better terms)
• Reliable income through salaries, bonuses, commissions and more
• A debt-to-income (DTI) ratio below 36%

While minimum requirements vary by lender, the best personal loans tend to go to the most creditworthy borrowers, and the largest loans go to those with the highest income.

Before borrowing, review your income, credit and debt levels to see where you stand, and if possible, take steps to stabilize your income, build credit or reduce your debt.

2. Work on Your Credit

Making a significant credit score leap overnight might not be realistic, but strengthen your credit as much as possible before applying for a loan.

Consider taking the following actions before borrowing to lower your interest rate:

How To Get a Debt Consolidation Loan With Bad Credit or High DTI

If you can’t improve your credit before borrowing or have a high DTI ratio, these strategies could help you get approved.

• Get a co-signer. A co-signer is someone who backs your loan and promises to repay your debt if you miss payments. Their guarantee on your loan can increase your approval odds and lower your interest rate. The best co-signer is someone who has very good or excellent credit (740 or higher) and a DTI below 36%.
• Apply with a co-borrower. A co-borrower is someone who is a joint applicant on your loan and is equally responsible for debt repayment. Applying with a co-borrower who has good credit can improve your loan terms, but note that a co-applicant is also equally entitled to loan funds, unlike a co-signer who just backs the loan.
• Borrow from a lender with lenient credit requirements. Certain lenders provide bad credit loans or loans for borrowers with limited credit. However, interest rates on these types of loans tend to be higher, so be sure to shop around and compare costs.

3. Gather Required Documents

After you submit your applications, lenders often ask for documentation to verify the information you provided. Getting this information ready in advance could help you speed through the application process.

These are documents lenders may require that you should have handy:

• Government-issued identification
• Paystubs
• Bank statements
• Tax documents

4. Prequalify With Lenders

Many online lenders let you prequalify for debt consolidation loans with just a soft credit check that doesn’t affect your credit score. It’s a good idea to prequalify with at least three to four lenders, so you can review quotes before settling on a loan.

Here are factors to compare when reviewing different lender options:

• Interest rates: Personal loan interest rates are typically expressed as an annual percentage rate (APR). Rates often range from 6.49% to 36% APR, depending on the lender. Lower APRs are better, but you should also consider other one-time costs and loan features to choose the best loan for your budget and situation.
• Fees: Loans may have one-time origination fees ranging from 0% to 12%. Fees are typically set based on creditworthiness, so borrowing with strong credit can lower your cost.
• Terms: Terms for consolidation loans generally last from 12 to 84 months, depending on the lender and how much you borrow. The lender may offer you different loan term options to compare and choose from.
• Direct-pay options: Several lenders offer you the option to directly send your loan funds to your creditors after approval. This could save you time, and in some cases, you may even qualify for a rate discount for choosing to direct-pay your creditors.
• Borrower benefits: Lenders may offer various benefits, like the opportunity to earn rewards points to put toward your debt and discounts for setting up autopay.

5. Apply for the Loan and Sign

After choosing a loan, follow the steps provided by the lender to complete the full loan application. Applications typically involve a hard credit check that shows up on your credit report.

The final step is signing the loan documents provided by your lender. Then, loan funds will be deposited into a bank account of your choosing, sent directly to your creditors to consolidate debt or mailed to you in a check.

Frequently Asked Questions (FAQs)