Step by Step: How to Qualify for a Debt Consolidation Loan

A debt consolidation loan is usually the simplest and most inexpensive way to consolidate credit card debts. The idea is to get a new loan with a lower interest rate and use that loan to pay off all of your other high-interest debts.

Even if you have bad credit, qualifying for a new loan is possible. You just need to do a little bit of extra legwork.

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Eight steps to qualify, regardless of credit score

Many people are afraid to seek out a new loan because they fear rejection. But if you take action and find a new loan with a lower fixed interest rate, it could potentially save you thousands of dollars in interest over the life of your loans.

Here are the eight steps to follow to consolidate your debts successfully:

1. Learn your credit score

When you apply for a debt consolidation loan, lenders will check your credit report. They will use that information to assess your creditworthiness: credit score, credit history, on-time payment history, income, debt-to-income ratio, credit utilization ratio, and other financial details to determine interest rates, loan payment terms, and lending amounts. Your credit score will matter. It’s essential to know where you stand before you start to consider loan options.

The higher your credit score, the lower your interest rate will be. But don’t despair if your credit score needs work. There are even personal loan options for people who’ve declared bankruptcy. You’ll just pay a higher interest rate. And debt consolidation will help your credit score in the long run.

If you have a bad credit score, qualifying may not be easy, but it will be worthwhile.

You don’t have to have excellent credit to be a successful applicant, but applicants with good credit scores will qualify for the lowest interest rates.

These are the average FICO score ranges:

Good credit: 670 to 739
Average credit: 580 to 669
Poor credit: 300 to 579

You can learn your credit score from any of the three major credit bureaus, your credit card company or a free service like Credit Karma.

If you are on the cusp of the next highest score level, consider taking a month or two to boost your credit score to qualify for a lower annual percentage rate (APR). One point may be all you need to save more on the life of the loan.

2. Compare lenders

Don’t complete applications just yet. First, look for lenders who issue loans to borrowers in your credit score range. What are their typical interest rates, loan terms and maximum loan amounts? Will it be enough to consolidate all of your loans? You will also want to compare loan origination fees from lender to lender. The origination fee will increase your total debt amount.

Make a short list of the lenders that best match your qualifications.

3. Make a plan

Start by answering the following questions:

Which debts do you want to consolidate?
How much money will you need to borrow?
What sort of monthly payments can you afford?

Once you have the answers, there are three more key factors to consider when figuring out whether debt consolidation is your best option.

Will you save money? If you qualify for a lower interest rate, more of your monthly payments will go toward principal and you’ll pay less in interest over the life of the loan.
Will you get out of debt sooner? Find the loan with the lowest possible interest rate and the shortest repayment period that you can afford. Debt consolidation won’t help you at all if you get a new loan, but the monthly payment is too high for your budget. The key is to find the spot where you’re paying as much toward your loan as possible without putting your financial situation at risk.
Will you have smaller monthly payments? A longer loan term will cost you more in interest in the long run, but the smaller monthly payments will give you the budget flexibility so that you can cover your monthly expenses without putting them on credit cards.

Pro tip: Debt consolidation will not make financial sense if you only qualify for loans with higher interest rates. In that case, it will just increase the amount of debt you’ll have to pay. If this is where you stand, it’s time to consider debt settlement instead.

4. Use a debt consolidation calculator

Figure how much you’re paying each month and how much you can afford in monthly payments. Calculate the total loan amount you need to consolidate everything into one charge and the loan term to keep the minimum payment required each month within your budget. Add in an estimated interest rate and the number of months to pay the debt.

If you aren’t sure where to start, several online loan calculators are available.

READ MORE: Debt consolidation pros and cons

5. Find and compare loans

Not all loans are created equal. Some are better for applicants with good credit, some work better for people with low amounts of debt and others are customized for applicants with bad credit. Figure out which type of loan you need.

Types of loans

Debt consolidation loans: These loans usually have a repayment period of five years or less, so they’re great for consolidation, but won’t be ideal if you have several thousand dollars to consolidate. You may not be able to afford the monthly payments.
Personal loans: These have longer repayment periods, but also higher interest rates. However, credit score requirements will be more flexible.
Loan matching services: These services allow you to complete one application and will match you with online lenders, then you compare loan offers. The credit score requirements are usually minimal, but the interest rates are higher to offset the lenders’ higher risk.
Peer-to-peer loans: P2P lenders match borrowers with investors who are interested in funding loans for people who are often overlooked by traditional lenders.

Pro tip: If your credit score is bad enough that you’re unable to prequalify, you may need consider applying with a co-signer to boost your odds of approval.

6. Prequalify

Prequalification will give you a more specific idea of the interest rates a lender will give you, how much money you can borrow and repayment terms, but it won’t hurt your credit score. Until now, the research you’ve done has been based on averages. Since prequalification requires a soft credit check (which won’t affect your credit score), the lender will have a specific idea of your financial situation. It’s no guarantee that you’ll get the exact loan amount and terms you want, but it will help you narrow the field to your best loan options with the lowest interest rates and fees.

You can try to prequalify with multiple lenders or use a loan matching service to save yourself some paperwork. However, if you have good credit, loan matching programs may not get you the best deal.

READ MORE: How debt consolidation works and best loan options

7. Complete an application

Once you’ve prequalified for a loan and chosen a lender, it’s time to start the official application process. It can take as little as a few minutes or as long as a couple of weeks for you to learn whether your loan application was approved.

Pro tip: When you complete the application, the lender will run what’s known as a “hard credit inquiry.” This could knock down your credit score by a few points for a few months. This is why it’s important to have an idea of which loan you want before completing the application. You don’t want to submit multiple applications, because your credit score will fall with each one.

The loan proceeds are usually deposited directly into your bank account. The money can hit your bank account as quickly as the next business day, or it can take a couple of weeks, depending on your lender.

8. Use the new loan to pay off your other loans

Once approved, use the new loan to pay off your existing debt and credit card balances. Start with the highest-interest ones and work your way down. Then set up autopay to ensure your new loan is paid before the due date each month.

Some lenders pay your debt directly to the credit card company. Some will deposit it directly to your account for you to be responsible for making your own debt payments.

Make sure your other loans are paid in full

Double-check your consolidated accounts to make sure your balance is zero. Occasionally you may be hit with an unexpected interest charge or prepayment penalty. You don’t want to rack up late payments on accounts you thought were paid in full.

Pro tip: Consider closing some of the now-paid accounts. Debt consolidation won’t help in the long run if you continue to run up credit card debt. Keep two credit card accounts open: the oldest account and the one with the highest credit limit. These will help your credit score because the average age of credit and credit utilization (the percentage of your available credit that you’re using) are both key scoring factors.

Other options

Don’t get discouraged if you’ve completed all of these steps and your loan application is still rejected. You still have a few more options.

Apply with a co-signer
Secured loans
Debt settlement
Debt Management Plans
Credit card balance transfer
Home equity loan or home equity line of credit (HELOC)
Mortgage refinance

Not sure how to proceed?

DebtHammer can help. We offer a free initial consultation to review your debt consolidation and settlement options. Click here to get started.

The bottom line

Fear of rejection is a common reason people shy away from debt consolidation. Instead, they spend years paying thousands of dollars in interest. But there are plenty of ways to consolidate your debt, even if your credit history is bad. With a little research, you can often find a lender willing to work with you.

How to Qualify for a Debt Consolidation Loan: A Step-by-Step Guide