Debt can be overwhelming, especially when it’s spread across multiple accounts and you’re juggling multiple monthly payments. Debt consolidation loans can make your debt more manageable by combining all of your balances into one personal loan with just one monthly payment.
If you are considering getting a debt consolidation loan, this step-by-step guide will walk you through the process.
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1. Check your credit
You will want to know your credit score before you start applying for credit. This will help you get an idea of the types of debt consolidation loans you are eligible for.
There are many ways to get your credit score for free. For example, your credit card may offer free credit scores. And Experian offers a free basic subscription that includes your credit score.
2. Pull your credit report
It is also wise to research credit report errors before applying for credit. Pulling your credit report is different from checking your credit score, so you will need to do it separately. You can get a free credit report from the three major credit bureaus at AnnualCreditReport.com.
Comb all three to make sure everything in your credit history is correct. If you find a mistake, dispute it and make sure it is removed before applying for a debt consolidation loan. Removing negative credit scores that are not accurate should give your credit score a big boost, which will help you qualify for the best personal loans.
3. Make a list of your debts and your monthly payments
Next, you’ll want to go through all of your accounts and list the total balance, monthly payments, and interest rate for each. This should include all of your:
You will need this information for the next step, which will help you determine if a debt consolidation loan will actually be financially beneficial for your situation.
4. Consider your loan options
Once you know your credit score, you should have an idea of the debt consolidation loans that you are eligible for. Just be sure to consider all of your options, such as:
And in particular, pay attention to the following characteristics:
You’ll want to get the lowest APR possible to keep the loan affordable, but you also want to get a loan that’s big enough to pay off all of your debt.
You’ll need a loan term that’s long enough to keep your monthly payments manageable, but not so long that you’ll end up spending more interest than you need to.
Finally, be sure to pay attention to any other fees associated with the loan, such as origination fees or prepayment charges. Look for loans with little or no fees.
5. Use a debt consolidation calculator
With all of your account information listed and an idea of your loan options, you can use a debt consolidation calculator to estimate your monthly payments and your debt repayment schedule. Look at how long it will take you to pay off a debt consolidation loan, what your monthly payments will be, and how much you will end up spending on interest.
From there, you can decide if a debt consolidation loan is right for you. Ideally, you want a loan that allows you to pay less interest than what you are currently paying. However, if you need to reduce your monthly payment, this might not be possible. Making sure you can pay your monthly payments and that you don’t fall behind should be your first priority – after that, look to minimize the fees you pay.
6. Apply for debt consolidation loans
Once you’ve narrowed down your options to a list of lenders who offer what you need for a debt consolidation loan, start applying. You can apply to multiple lenders to compare the best rates, but you’ll want to do it in a short period of time.
Several short-term loan applications are usually consolidated into one application on your credit report, which will minimize the potentially negative impact on your credit.
If you are not eligible for any debt consolidation loan, you may also want to consider getting a personal loan with a co-signer. This can help you qualify if your co-signer has good credit, but they’ll also be responsible if you don’t pay off your loan.
7. Close the loan and set up automatic monthly payments
When you are approved for a debt consolidation loan, you close the loan. The lender may pay off all of your debts directly or deposit the loan amount into your account, in which case you will want to pay off all of your balances immediately. Check back later to make sure all your account balances are zero.
Setting up automatic monthly payments with your new loan is a great way to make sure you don’t miss any payments. Some lenders even offer discounts for setting up automatic payment.
Now that you understand the process, you can begin to find the right debt consolidation loan for your needs.