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If you are paying off high interest debt, especially credit card debt, you may be familiar with debt consolidation loans. You can use a debt consolidation loan to save money, get out of debt sooner, or lower your monthly payments, but only if you know how to get approved for a debt consolidation loan. We’ll help you figure it out through this five-step process.
1. Check your credit score
Your chances of getting a debt consolidation loan that’s right for you are better if you have a good credit score, which is generally defined as 670 or higher by FICO. Generally, the higher your credit score, the better your chances of qualifying for a loan.
In some cases, your credit report may contain errors. So you should first check your credit report to make sure everything is correct. Your credit history shown on your credit report helps establish your final credit score. Additionally, you will want to check your credit score in addition to your report. Several credit card issuers allow you to check your score for free.
If your credit score needs improvement, see what you can do to fix it. While improving your credit may take some time, there are some quick ways to correct your score. If you can wait to apply for a consolidation loan until your score improves, this is almost always a better option.
2. Make a debt consolidation plan
Before applying for a debt consolidation loan, it is important to know what you want to get out of it. Obviously, you are looking to simplify your debt repayments by combining them into one loan. But here are some other common reasons people apply, along with the type of loan you should be looking for in that case:
- You want to save: Look for a loan with a lower rate so that more of your payment goes towards paying off the balance each month instead of interest.
- You want to get out of debt sooner: Look for the shortest loan term with the payments you can afford. Of course, you can always pay more for your debt at any time, but choosing a shorter term forces you to make those payments.
- You want smaller monthly payments: Choose a longer duration. It will cost you more in the long run, but spreading your payments out over time will make each one smaller.
It is a good idea to use a debt consolidation loan calculator play with the numbers to see what your options might cost you. For example, if you consolidated all of your debt into one loan, could you pay the monthly loan payments over 10 years? What about a five-year or even three-year loan? How much money would that save you?
3. Find and Compare Debt Consolidation Loans
Now that you have an idea of what to look for, you can target your search for lenders with loans that match your needs.
Now is a good time to check your rate and the terms of your loan with as many debt consolidation lenders as possible. The more the better, as it will increase your chances of finding the best loan for you. There are many rate shopping sites out there, and you can also check directly with individual lenders, such as credit unions, banks, or online lenders. Make sure each lender does a smooth credit withdrawal first, to protect your credit score from any pitfalls.
4. Apply for your loan
Once you have found the best lender, it is time to apply for the loan. You will likely need to provide additional documents. Your lender can tell you what they need, but you will usually need to provide documents such as your most recent pay stub, past income tax returns, bank statements, or personal identification such as a copy of your driver’s license.
Most lenders only take a few minutes to review your application and qualify you, but if they need additional documents it can take a few days. It’s a good idea to keep an eye out for emails or phone calls from your lender during this time in case they need anything. This can speed up the approval process so you can get your response back sooner.
5. Pay off your loan
If you’ve been approved, congratulations! Now is a good time to sign up for automatic payment so you don’t have late payment charges or damage your credit due to a late payment mark on your credit report.
It is also a good time to avoid getting into debt in the future. Not everyone gets into debt for their own faults (hello, medical bills and low wages). But if you could do a little better by saving more and spending less, working in these areas is crucial so that you don’t have another pile of debt by the time you pay off that loan.
Tips For Managing Debt Consolidation Loans
It is one thing to apply for and qualify for a debt consolidation loan, it is another to handle it responsibly. Here are five tips to help you understand and manage your new loan:
- Understanding Personal Loans: Most debt consolidation loans are personal loans. These are simple, low-interest, fixed-term loans. But if you don’t mind a little more complexity, you can also consider an introductory 0% APR credit card, HELOC, or home equity loan.
- Check out all the additional loan features: Besides the APR, it’s also a good idea to look at other features that lenders might offer. For example, some lenders pay off your old debt for you, so you don’t have to do this step yourself.
- Continue to pay off your old loan until it is clear: After you or your new lender has paid off your old debt, wait until you hear from your old lender that your balance is zero. After all, payment can take a few days to process. If you accidentally pay too much, you will be refunded.
- Configure automatic payment: Managing your loan is much easier when you sign up for automatic payment. This will ensure that you never miss a payment, leaving you free from late penalties, such as charges or negative marks on your credit report.
Frequently Asked Questions (FAQ)
Is It A Good Idea To Get A Debt Consolidation Loan?
It depends. If you’re looking to get out of debt faster and save money, getting a debt consolidation loan can help you do that if you can qualify for a lower rate. If you’re having trouble making your payments and don’t mind paying more in the long run, getting a longer-term debt consolidation loan can help lower your monthly payments.
How To Qualify For A Debt Consolidation Loan?
Each lender sets their own qualifying requirements for debt consolidation loans. Your chances of getting approved are better if you have a good credit score (at least 670) and a stable income.
Are Consolidation Loans Harming Your Credit Score?
Applying for a debt consolidation loan (with bad credit) can lower your score by up to five points for a year. If you miss payments, it can also hurt your credit score. But if you make all of your payments on time (hint: sign up for auto-pay), you’ll usually see an increase in your credit score over time, as your payment history is the most important factor that makes up your score. .