How to Get a Debt Consolidation Loan in 8 Steps

BY The Lenders Network

debt consolidation loans

7 minute read

American’s have debt, lot’s of it.

According to a recent report, the average American has more than $38,000 worth of personal debt–and that number seems to be increasing year after year.

You can start to eliminate it by taking out a debt consolidation loan.

A debt consolidation loan can help you pay off your debt quicker with a lower interest rate.

Before you take out a consolidation loan, though, you should look around to find the best loan for your specific situation. You want to find a loan with the lowest interest rate possible.

Here are some tips for finding the best debt consolidation loans.

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1. Start by Considering How Large of a Loan You Need

The first thing that you’re going to want to do when you’re thinking about applying for a debt consolidation loan is sit down and figure out how large of a loan you actually need.

There are many Americans who have so much debt that they’re afraid to crunch the numbers to find out. But in order to obtain a consolidation loan, you’re going to need to get over this fear and add up all your debt.

You should include everything from credit card debt to medical bills to see just how bad your debt is. It’ll give you an opportunity to apply for a loan that will cover the entirety of your debt so that you can wipe the slate clean.

What Determines How much You Qualify For

  • Credit rating
  • Reported income from all sources
  • Loan purpose
  • Debt-to-income ratio

Maximum Loan Amounts by Loan Type

  • Personal loan – $5,000 – $100,000
  • Short term personal loan – $5,000 – $40,000
  • Home equity loan – Up to 1 million (80% of your home’s value)
  • Home equity line of credit (HELOC) – Up to $500,000
  • Secured loan – Depends on the value of collateral used
  • Unsecured loan – $1,000 – $35,000

2. Check Your Credit Score

Another thing that you’re going to want to do before you applying for a debt consolidation loan is to check your credit score.

Your credit score not only determines if you qualify for a loan, but the interest rate you get is directly tied to your score.

Generally speaking, a score that sits somewhere in the 700 range is considered good. If your score is that high, you shouldn’t have any problem convincing lenders to give you a loan.

But if your score is below 640 and your credit history isn’t the best you may have trouble finding a loan.

So it could be a good idea for you to work to bring your credit score up so that you don’t run into any issues when you start your search for the best consolidation loans.

Where to Check Your Score for Free

3. Compare Loan Offers and Rates from Multiple Lenders

Don’t make the mistake of getting a loan with the first lender to approve you without getting loan quotes from other lenders.

Rates and origination fees will vary lender to lender. You should get at least 3 loan quotes and compare them side by side to ensure you’re getting the best deal.

Since it is difficult to compare loan quotes with varying rates and lender fees you should look at the APR. The annual percentage rate includes the rate and other fees to give you the total cost of the loan.

4. Explore All the Options Available to Consolidate Debt

Generally, when someone refers to a consolidation loan, they are referring to a personal loan. A personal loan is an unsecured installment loan with a fixed rate that is repaid in monthly installments.

But there are other types of loans that can be used to consolidate debt. Before you go out and get a personal loan it’s a good idea to look into all your debt consolidation options.

Home Equity Loans

If you own your home and owe less on your mortgage than your home is worth, you may be able to use that equity to get a loan. With a home equity loan you can borrow up to 80% of your home’s value and get a low rate.

For example: If you have a house with a market value of $300,000, and your mortgage has a $200,000 balance, you will be able to borrow up to $40,000.

Advantages of Home Equity Loans

  • Lower interest rates than personal loans
  • Longer loan terms up to 10 years, or more
  • Large loan amounts up to 80% of your home’s value
  • Maybe tax deductible

You can also use your equity to get a home equity line of credit (HELOC), which works like a credit card. You will get a credit line that you can borrow from as you need it, as you repay the amount borrowers it becomes eligible to be borrowed again.

Balance Transfer

If you are dealing with credit card debt you should see if you can transfer your credit card balances to lower interest rate card. There are balance transfer credit cards that come with zero interest for the first 6-18 months. This is the best option to consolidate credit card debt if you qualify.

Search for balance transfer credit cards

Student Loan Deferment

If you have student loans you’re looking to consolidate, you may be able to have your payments deferred for up to 48 months. If you are in school or planning to return to grad school you can have your loan payments reduced, or deferred.

Personal Loans

Personal loans are the most used type of loan to consolidate debt. Personal loans come with a short term repayment period between 36 months to72 months and allow you to borrow up to $100,000.

Personal loans also come with a fixed interest rate so your payments stay the same throughout the life of the loan.

Most lenders require a 640 credit score, however, there are some personal loan lenders that require just a 580 credit score to qualify.

5. Get the Best Rate Possible

The main reason people take out consolidation loans is to move their high-interest debt to a low-interest loan, so getting a loan with a low rate is very important.

When you’re able to secure a loan with a low-interest rate, you’ll pay less money over time than you would if you were to accept a loan offer with a higher rate. Depending on how much debt you have, you could end up saving yourself hundreds, if not thousands, of dollars over the life of a loan thanks to a low rate.

You should also keep an eye out for any other fees that might be associated with loans. Additionally, you should try to steer clear of accepting any loan that will subject you to a prepayment penalty in the event that you decide to pay off your loan early.

6. Work on Improving Your Credit Score

The higher your credit score, the lower your interest rate will be. Before applying for a consolidation loan it’s a good idea to see if there is a way to improve your FICO score.

Quick Ways to Raise Your Score

Lower your credit utilization ratio – Credit utilization is the amount of available credit you’es using. By paying down your credit card debt you’re able to increase your score fairly quickly. Try to keep your balances below 20% of their credit limit.

Get added as an authorized user – An authorized user is a second person on a credit card account who is able to use the card. When someone adds you onto their account, the entire account history will be shown on your credit report, so make sure the account you/’re being added to is in good standing with no late payments.

Dispute negative accounts – You can dispute anything on your credit report you believe is inaccurate. If you have any late payments, or collection accounts try disputing them with the credit bureaus. The creditor has 30 days to respond to the dispute, or the account must be removed.

Read this article for more tips on how to improve your credit score in a hurry

7. Make Sure a Lender Is Reputable Before Accepting a Loan

Getting a low-interest rate on a debt consolidation loan is very important. It’ll save you quite a bit of money over the long run.

But no matter how low of an interest rate a lender offers you, you shouldn’t work with that lender if they don’t have a good reputation in the debt consolidation industry. You should always do your homework on a lender before taking out a loan through them and see what others have said about them over the years.

You and the lender that you choose are going to have a close working relationship once you accept a loan offer from them. Make sure they’re easy to work with and well respected within the industry by both their peers and their clients.

If you have bad credit and want a debt consolidation loan check out our article here.

8. Avoid Taking on New Debt While Paying Down Your Loan

As long as you’ve followed all the other tips listed here, you should be ready to accept a loan offer from a lender at this point.

But here’s one more tip that you should keep in mind once you agree to take on a debt consolidation loan: Don’t rack up more debt while you’re paying it off! If you do, you could potentially put yourself into an even worse position than the one you were in before.

The Bottom Line…

Taking out a debt consolidation loan could provide you with the financial freedom that you haven’t had in years. It’ll feel so good to climb out of the debt you’ve been living in for so long.

  • Determine how much debt you have
  • Check your credit score
  • Compare loan offers from multiple lenders
  • Explore all debt consolidation options
  • Get the best interest rate possible
  • Improve your credit before applying
  • Work with a reputable lender
  • Do not take on more debt

Just make sure you don’t take out a consolidation loan that will be too difficult for you to pay back.

Look for one with a low-interest rate that’ll make your debt more manageable in the years to come.

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