Step-by-Step Guide to Getting a Debt Consolidation Loan
by Elizabeth Aldrich | Updated July 21, 2021 - First published on July 11, 2021
Make sure to go through every step if you want to get the best rates and avoid missing payments.
Debt can be overwhelming, especially when it's spread out across more than one account and you're juggling multiple monthly payments. Debt consolidation loans can make your debt more manageable by combining all your balances into a single personal loan with one monthly payment.
If you're considering getting a debt consolidation loan, this step-by-step guide will walk you through the process.
1. Check your credit
You'll want to know your credit score before you dive into credit applications. This will help you get a sense of what kinds of debt consolidation loans you qualify for.
There are plenty of ways to get your credit score for free. For example, your credit card might offer free credit scores. And Experian offers a basic membership for free that includes your credit score.
2. Pull your credit report
It's wise to look for credit report errors before applying for credit as well. Pulling your credit report is different from checking your credit score, so you'll have to do this separately. You can get a free credit report from all three major credit bureaus at AnnualCreditReport.com.
Comb through all three to make sure everything in your credit history is accurate. If you find an error, dispute it and make sure it's removed before you apply for a debt consolidation loan. Removing negative marks from your credit that aren't accurate should give your credit score a nice boost, which will help you qualify for the best personal loans.
3. Make a list of your debts and monthly payments
Next, you'll want to go through all your accounts and list out the total balance, monthly payments, and interest rate for each one. This should include all of your:
- Credit cards
- Any other debt you hold
You'll want this information for the next step, which will help you figure out whether or not 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 a sense of what debt consolidation loans you can qualify for. Just make sure to consider all your options, such as:
And in particular, pay attention to the following features:
- Minimum credit score you need for a personal loan
- How much personal loan you can get
- Personal loan interest rates
- Repayment terms on personal loans
- Loan fees
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 your debt.
You'll need a loan term that's long enough to make your monthly payments manageable but not so long that you end up spending more on interest than you need to.
Finally, make sure you pay attention to any other fees associated with the loan, such as origination fees or prepayment fees. Look for loans with low or no fees.
5. Use a debt consolidation calculator
With all your account information listed out and an idea of what your loan options are, you can use a debt consolidation calculator to estimate your monthly payments and debt payoff 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'll end up spending on interest.
From there, you can decide if a debt consolidation loan is really right for you. Ideally, you want a loan that lets you pay less in interest than what you're currently paying. However, if you need to lower your monthly payment, this might not be possible. Making sure you can afford your monthly payments and won't fall behind should be your first priority -- after that, look to minimize any fees you're paying.
6. Apply for debt consolidation loans
Once you've narrowed your options down to a list of lenders that offer what you need in a debt consolidation loan, start applying. You can apply with multiple lenders in order to compare the best rates, but you'll want to do this in a short time frame.
Multiple loan inquiries in a short period of time are usually lumped together as one inquiry on your credit report, which will minimize the potentially negative impact on your credit.
If you're unable to qualify for any debt consolidation loans, you can also consider getting a personal loan with a cosigner. This can help you qualify if your cosigner has good credit, but they'll also be on the hook if you don't repay your loan.
7. Close the loan and set up automatic monthly payments
When you're approved for a debt consolidation loan, you'll close the loan. The lender may pay off all your debts directly, or they may deposit the loan amount in your account, at which point you'll want to pay off all your balances immediately. Check back later to make sure all your account balances are at 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 autopay.
Now that you understand the process, you can get started on finding the right debt consolidation loan for your needs.
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