Juggling multiple debts can feel like spinning plates. One moment, you’re worried about making a car payment, and then you remember the utilities are due. If you’re not careful, one of those plates is bound to crash on the floor.
You’re not alone — many struggle to remember all their outstanding debts. One solution is to combine debts for easier management, which is done through a debt consolidation loan.
But how to get a debt consolidation loan and pay it back? Let’s break it down.
Key Takeaways
- Debt consolidation combines multiple debts into one loan, which must have a lower interest rate than your current debts.
- Credit score and steady income are essential for getting a debt consolidation loan.
- Understand fees and penalties before applying.
- To qualify for a debt consolidation loan, you must be 18 years old or older, a U.S. permanent resident, have a valid ID, and proof of income.
Debt Consolidation Loans Explained
Debt consolidation loans are personal loans that combine multiple debts into a single, easier-to-manage payment. The typical debt consolidation loan amount ranged from $10,000 to $20,000. Instead of manually tracking several bills, you roll them into one loan. Ideally, debt consolidation loans come with lower interest rates, too.
Example: Let’s say you have three credit cards with balances of $2,000, $5,000, and $8,000. Each has interest rates ranging from 8% to 25%. Managing all these can seem a bit chaotic and expensive.
What you could do instead is combine them into a debt consolidation loan for $15,000 and hopefully receive a lower APR.
How to Qualify for a Debt Consolidation Loan in 5 Steps
Before requesting a loan, consider these factors:
1. Check Your Credit Score
Applying for a loan involves a hard credit inquiry. This may temporarily lower your credit score by about five to 10 points. However, if you use the loan to pay off credit cards and reduce your credit utilization ratio, your score could improve over time.
Typically, borrowers see their credit scores improve within a few months of consolidating their debts. This, of course, is assuming that they make timely payments.
2. Compare Interest Rates and Total Cost
Pay close attention to your loan’s interest rate. The goal here is to secure a rate lower than the weighted average of your current debts.
For instance, if your existing debts have an average interest rate of 20%, consolidating at a 12% rate could save you a decent amount over the life of the loan.
If you cannot pay the loan in time, you may be able to extend the term. Keep in mind that this may result in paying more interest. To be safe, you can use a loan calculator to determine the total cost.
3. Review Origination Fees and Prepayment Penalties
Some lenders charge origination fees ranging from 1% to 8% of the loan amount.
On a $10,000 loan, that’s an extra $100 to $800.
Additionally, there may be prepayment penalties for paying the loan off early.
4. Loan Terms and Monthly Payment Amount Analysis
Go through the loan’s repayment terms: how much is the monthly payment, and how long will the loan take to pay? Make sure the monthly repayments are affordable and you are not at risk of defaulting.
The longer the term, the smaller the monthly payments, but unfortunately the interest will be higher. With shorter terms, you may have the burden of higher monthly costs, but you will pay less interest in general.
5. Formulate a Repayment Strategy
A solid repayment plan ensures that you make timely payments, which will help you improve your credit score and stay away from further debts.
Consider setting up automatic payments to avoid missed deadlines and budgeting strategies to manage your finances effectively after consolidation.
What Are the Requirements for a Consolidation Loan?
So, how do you qualify for a debt consolidation loan? Here are the standard requirements, along with some averages and estimates to give you a clearer picture:
- You will need a valid, government-issued ID to show that you are a U.S. citizen or permanent resident.
- You must be at least 18 years old.
- You should have an active checking or savings account for the loan deposits.
- The average credit score for approved debt consolidation loans is around 700. A higher score can qualify you for lower interest rates.
- You’ll need proof of steady income, which you can show via pay stubs or tax returns.
- Consistent employment for at least two years is a plus. Lenders consider it a sign of stability and responsibility.
- Lenders will check your credit history for red flags such as bankruptcies or loan defaults.
Consolidating debt can be a great way to simplify your finances and save you money on interest. Before doing so, consult a financial advisor to understand your options better.
Debt Consolidation Loans FAQ
Figuring out how to qualify for a debt consolidation loan can be confusing. You might have some unanswered questions even after reading the article. Here are some of the most common questions.
Is the Rate for a Loan for Debt Consolidation Fixed or Variable?
Debt consolidation loans often come with fixed interest rates. This means that your monthly payment remains the same throughout the loan term.
Note: Always read the fine print to understand the loan terms before signing up.
Is It Possible to Get a Consolidation Loan with Bad Credit?
Yes, credit consolidation is possible even if you have bad credit, but it may be more difficult to find, and it will likely cost more. Lenders may offer loans with higher interest rates ranging from 20% to 35.99%. Collateral might also be required to secure the loan.
Alternatively, you could consider a co-signer with good credit who might help you qualify.
How to Qualify for Debt Consolidation Loans without Homeownership?
Many lenders offer unsecured personal loans for debt consolidation that do not require any collateral. This means that you do not need to own a home to qualify. Approval lies more heavily on your credit score and income.