How Do You Qualify for a Debt Consolidation Loan? | Bankrate (2024)

Key takeaways

  • Applying for a debt consolidation loan requires a firm understanding of your credit, the amount of debt you are carrying and remaining payments.
  • Debt consolidation boasts the benefit of a more predictable monthly payment and the potential to save money on interest and pay off your debt faster.
  • Downsides include the risk of additional costs in the form of fees and packing on more debt if unhealthy financial habits aren't addressed after going through the process.

If you’re struggling with debt, a debt consolidation loan can help you get a handle on your overwhelming balances. It lets you roll multiple high-interest debts into a new loan product, preferably with a lower interest rate than you’re currently paying.

Depending on the loan terms, you could save money on interest and pay off your balances sooner. But before applying, it’s best to learn what you’ll need to qualify for this type of loan to increase your approval odds.

How to qualify for debt consolidation

Make sure to weigh the pros and cons of debt consolidation loans before you apply. If you decide it’s the right move for you, here’s how to move forward.

1. Check credit score

You’ll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. Although a lower credit score doesn’t automatically equal a denial, as some lenders offer loans for bad credit, the borrowing costs will likely be higher. If that’s the case, taking out a debt consolidation loan may not be worth it, as you won’t be able to save money on interest.

There are a few ways you can check your credit score. Some lenders, like SoFi, allow you to view your score for free if you have an account with the company. You can also request a free annual copy from all three credit bureaus by visiting AnnualCreditReport.com. Although these copies won’t have your actual score, they will give you an idea of where you stand with creditors and whether you need to improve your credit before moving forward.

2. List out debts and payments

Create a list of all the debt accounts you plan to consolidate. Include the amount you owe, the interest rate and the minimum monthly payment. Then, add all of them to know how big of a loan you’ll need to consolidate the balances.

After that, add up all of your minimum payment amounts to see how big a monthly payment on a debt consolidation loan you can afford. Once you have that down, use a loan calculator to see the terms and interest rates you’ll need to secure for the loan to serve its intended purpose.

3. Compare lenders

Banks, credit unions and online lenders offer debt consolidation loans. Research several options to find the lender that’s most ideal for you. When comparing lenders, consider the annual percentage rates (APRs), fees and any other perks they offer borrowers. Also, look for consumer feedback on platforms like the CFPB’s Consumer Complaint Database and the Better Business Bureau to determine if they’re reputable.

Bankrate’s take:If the lenders offer online prequalification tools, consider using them to gauge your approval odds. You can also view potential loan offers and interest rates without negatively impacting your credit score.

4. Apply for loan

Gather any information and documentation the lender will need before applying to ensure timely application processing. Although this varies by lender, you’ll typically need to provide the following:

  • Proof of income: W-2s, 1099s, pay stubs or tax returns.
  • Proof of identity: Birth certificate, social security card, driver’s license, passport or another official ID.
  • Proof of address: Utility bills, lease or rental agreements, bank or credit card statements or voter registration card.

Once you have your documents handy, submit the loan application. Some lenders allow you to apply online, receive a quick decision and upload the supporting documents to issue final approval. But if you’re applying with a traditional bank or credit union, you may be required to visit a physical branch to apply, and it could take much longer to receive a lending decision.

5. Close loan and make payments

If approved, review the loan documents, get clarity on anything you don’t understand from the lender and sign on the dotted line. The lender will process the file for closing and disburse the loan proceeds. It’s up to you to pay creditors directly unless the lender offers direct payments to streamline the consolidation process.

Alternatives to debt consolidation loans

After exploring your options, you may find that a debt consolidation loan isn’t an ideal solution for you. Whether it’s because you don’t qualify for a loan with attractive terms or you need to access a larger amount, there are alternatives worth considering, including the following:

  • Recalibrate your budget. Spot opportunities to free up cash flow and use it toward debt repayment. Some ideas include cutting down on subscription services or switching to a cheaper internet or cell phone plan.
  • Use a balance transfer credit card. If you qualify for a balance transfer card with a 0 percent introductory rate, you could move several credit card balances into that account to pay them off faster while saving on interest.
  • Seek third-party help. If you have a significant amount of debt — $10,000 or more — and don’t know where to start, consider seeking help from a credit counseling agency or a debt relief company. Both options could help you consolidate your debt and negotiate with your creditors to get you more favorable terms.

Whether you choose a debt consolidation loan, a balance transfer credit card card or another alternative, you’ll need to avoid taking on more debt while paying off your balances for your situation to improve. You should also take a hard look at your finances to identify what got you in debt in the first place. This will help you quit unhealthy financial habits that could put your financial stability at risk in the future.

The bottom line

If you’re considering a debt consolidation loan to get out of debt sooner and save money, weigh the advantages and disadvantages it offers before applying. You should also understand the lending process and how to manage your loan so you’ll know what to expect and can take the necessary steps to boost your approval odds. But if you find that a debt consolidation loan isn’t right for you, other alternatives could be more suitable.

How Do You Qualify for a Debt Consolidation Loan? | Bankrate (2024)

FAQs

How Do You Qualify for a Debt Consolidation Loan? | Bankrate? ›

In general, your chances of getting a debt consolidation loan are better if you have a good credit score, usually defined as 670 or above by FICO. In some cases, your credit report may have errors that are bringing your score down, so first, you'll want to check your credit report to make sure everything is correct.

What do I need to qualify for debt consolidation? ›

In general, your chances of getting a debt consolidation loan are better if you have a good credit score, usually defined as 670 or above by FICO. In some cases, your credit report may have errors that are bringing your score down, so first, you'll want to check your credit report to make sure everything is correct.

What are the requirements for consolidation loan? ›

Qualifying accounts usually include a range of loans (excluding home loans), credit cards, and retail accounts. What do I need to apply for a debt consolidation loan? A good credit record. A regular monthly income of at least R5 000.

Why is it so hard to get approved for a debt consolidation loan? ›

Insufficient credit history or poor payment history can also lead to a denial of a debt consolidation loan. Remember, your payment history is the most important factor in your credit score, comprising 35% of your FICO® Score. Even one missed payment can damage your score.

Do you need proof of income for debt consolidation? ›

You'll need basic proof of identification, like a driver's license and Social Security card, as well as documents to prove your income, like pay stubs, bank statements and tax returns. You'll also want to gather the latest statements from your loans and credit card accounts.

Can I be denied debt consolidation? ›

Lenders like to see a credit score of at least 670 for a debt consolidation loan, but probably closer to 700 just to be safe. It's not the only factor that matters, but a low credit score could stop you from getting a debt consolidation loan with reasonable interest rates and terms.

What credit score is needed for a debt consolidation loan? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

What are 4 things debt consolidation can do? ›

Loan debt consolidation is when you take out a new loan to pay off multiple debts. Four types of debt are commonly consolidated: credit card debt, student loan debt, medical debt and high-interest personal loan debt. You may reduce the overall cost of repayment by securing better terms and interest.

Why won t my bank give me a consolidation loan? ›

Reason 1: You have too much debt for your income level

To consolidate your debts, you need to have a high enough monthly income to be able to easily make the monthly payment for your consolidation loan, which is calculated based on the interest rate and how long you plan to take to pay off the loan.

Can I get a government loan to pay off debt? ›

While there are no government debt relief grants, there is free money to pay other bills, which should lead to paying off debt because it frees up funds. The biggest grant the government offers may be housing vouchers for those who qualify.

Why did I get denied for a debt consolidation loan? ›

Consolidation loans are usually amortized over 3 to 5 years. This means that the payments have to be high enough to pay the loan off in 3 to 5 years. If your income can't handle that kind of a payment, you could be declined a consolidation loan.

Does everyone get approved for debt consolidation? ›

If you have excellent credit, high income and are borrowing a relatively small amount of money, it can be easy to get approved for a debt consolidation loan. On the other hand, if you have poor credit, low income and are applying for a large loan, it may be difficult to get approved.

How can I get out of debt with no money and bad credit? ›

How to get out of debt when you have no money
  1. Step 1: Stop taking on new debt. ...
  2. Step 2: Determine how much you owe. ...
  3. Step 3: Create a budget. ...
  4. Step 4: Pay off the smallest debts first. ...
  5. Step 5: Start tackling larger debts. ...
  6. Step 6: Look for ways to earn extra money. ...
  7. Step 7: Boost your credit scores.
Dec 5, 2023

How hard is it to get a $30,000 personal loan? ›

In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit. If you're having difficulty qualifying, you may consider getting a cosigner or co-borrower to help you get approved for the loan.

What is a hardship loan? ›

What Is A Hardship Loan? A hardship loan is a type of financing that helps people dealing with a financial crisis caused by an emergency expense or an income shortfall. You can use a hardship loan to cover everything from a surprise medical or car repair bill to necessities like food and rent.

What is the easiest loan to get approved for? ›

The easiest types of loans to get approved for don't require a credit check and include payday loans, car title loans and pawnshop loans — but they're also highly predatory due to outrageously high interest rates and fees.

Does debt consolidation hurt your credit? ›

If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.

How do you start debt consolidation? ›

You can consolidate debt by completing a balance transfer, taking out a debt consolidation loan, tapping into home equity or borrowing from your retirement. Additional options include a debt management plan or debt settlement, though these options may hurt your credit score.

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