How to Get a Debt Consolidation Loan in 5 Steps

A personal loan for debt consolidation can streamline multiple high-interest debts into one payment and help you pay off debt more quickly. Ideally, the consolidation loan should have a lower interest rate than the combined rate on your other debts, which helps reduce the overall cost of your debt and get you out of debt faster.

Here's how to get a debt consolidation loan in five steps.

» MORE: What is debt consolidation?

Start by checking your credit score. Borrowers with good to excellent credit scores (690 to 850 credit score) are more likely to be approved and get a low interest rate on a debt consolidation loan.

If you have bad credit (300 to 629 credit score) and can take some time to build your credit, you may qualify for a lower-rate loan. Here's how:

• Catch up on late payments. Late payments are reported to credit bureaus at 30 days past due, which can drop your credit score by as many as 100 points. If you’re within the 30-day window for a debt payment, there's still time to submit it.

• Check for credit report errors. Errors on your credit report, like payments applied to the wrong debts or accounts incorrectly marked closed, could be hurting your score. Check your credit reports for free at AnnualCreditReport.com and dispute any mistakes you find.

• Repay small debts. Debts owed account for 30% of your credit score. If you can, pay down any high-interest credit cards before you consolidate. This will improve your debt-to-income ratio, which can help you get a lower rate on the consolidation loan.

» COMPARE: Best debt consolidation loans for any credit score

Make a list of the debts you want to consolidate — credit cards, store credit cards, payday loans and other high-interest debts — and add up the total amount due. You’ll want your debt consolidation loan amount to cover the sum of these debts.

Add up the amount you pay each month toward your debts, and check your budget for any spending adjustments needed to continue debt repayments. The new loan should have a lower annual percentage rate and a monthly payment that fits within your budget. Commit to a repayment plan with your budget in mind.

It’s important to shop around for the best debt consolidation loan, since lenders offer widely different loan amounts, interest rates and repayment terms. Pre-qualification is the best way to compare loan options and includes filling out a short, online application with the lender, after which you can view your potential rate and loan term without any harm to your credit score.

» MORE: Pre-qualify with multiple lenders for free on NerdWallet

Online lenders, credit unions and banks all provide personal loans for debt consolidation, but online lenders are the most likely to offer pre-qualification.

• Online lenders cater to borrowers with all ranges of credit and can often fund debt consolidation loans the same or next day after you’re approved. 

• Credit unions are not-for-profit organizations that may offer lower rates to borrowers with fair or bad credit. You must become a member to apply for a loan. Membership is usually quick and affordable, about $5 to $25. 

• Bank loans work best for those with good or excellent credit. Customers with an existing banking relationship may have an easier time qualifying and may receive special perks like a rate discount or access to higher loan amounts.

Look for lenders that offer direct payment to creditors, which simplifies the consolidation process. After the loan closes, the lender sends your loan proceeds to your creditors at no extra cost.

Consider other features that some lenders offer, like a rate discount for setting up autopay, credit score monitoring or free financial education.

When you’re ready to apply for the loan, gather documents such as proof of identity, proof of address and income verification. Most applications can be completed online and require a hard credit pull. This may temporarily lower your credit score by a few points.

Take the time to read the loan document’s fine print. Look for any origination fees, which can affect the total cost of the loan, and confirm whether the lender reports on-time payments to the three main credit bureaus — Experian, Equifax and TransUnion — which can help build your credit.

If you don’t meet the lender’s requirements, consider adding a co-signer or co-borrower with good credit to your application. This can help you get a loan that you wouldn’t qualify for on your own.

Now that you’ve found and been approved for the loan you want, there’s one important step left.

If the lender offers direct payment, it will disburse your loan proceeds among your creditors, paying off your old debts. Check your accounts for a zero balance or call each creditor to ensure the accounts are paid off.

If the lender doesn't pay your creditors, then you’ll repay each debt with the money that’s deposited to your bank account. Do this right away to avoid additional interest on your old debts and to eliminate the temptation to spend the loan money on something else.

Finally, within about 30 days of receiving the debt consolidation loan, make your first payment.

» MORE: How to manage your personal loan payments

Balance transfer credit card

If you have good to excellent credit, you may qualify for a 0% balance transfer credit card. With this card, you can transfer your existing credit card balances and pay them down with no interest during the promotional period – sometimes as long as 21 months.

» MORE: Best balance transfer credit cards

Credit counseling

Credit counselors can help you enroll in a debt management plan, which is a type of consolidation product in which you pay down your unsecured debt (usually credit cards) over three to five years at a reduced interest rate. Make sure to go with a reputable nonprofit credit counseling agency.

» MORE: Find the right debt management plan

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