How to Get a Debt Consolidation Loan

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Carrying a lot of debt can be stressful. For some people, juggling multiple payments with different creditors can be too much to manage. Enter debt consolidation, a method of debt refinancing that involves taking out one new loan to pay off others. Debt consolidation can help limit the number of bills you pay each month and potentially save you money on interest.

When it comes to debt consolidation, you have several options depending on your credit history and credit scores. Some people use personal or debt consolidation loans to consolidate high-interest debt, such as credit card bills and payday loans. Others consolidate their debt by transferring high-interest credit card balances to a card with a lower annual percentage rate (APR) or by taking out a home equity loan to pay off outstanding debt. Both options can give you one monthly payment and a lower interest rate, helping you more easily manage your debt.

In this piece, we'll focus on how to get a debt consolidation loan and whether it's the right choice for you.

Is a Debt Consolidation Loan Right for You?

There are two main reasons people consolidate debt: to reduce the number of payments they make each month and to save money on interest over the life of their loans.

If you have a lot of high-interest debt, often from credit cards, you might consider a debt consolidation loan to reduce the total amount you pay over time. Access to a debt consolidation loan with even a slightly lower interest rate than the one you're currently paying can help shave thousands of dollars off the total amount you repay. Even if you have bad credit, a debt consolidation loan could still work for you.

You may also consider consolidation if you're having a hard time managing multiple payments. Instead of paying several different credit card bills, debt consolidation lets you pull all those debts into one place, leaving you with only one monthly payment. This can ease your mind and help you avoid missing a payment—which can have a serious impact on your credit scores.

Since a debt consolidation loan is essentially just a personal loan that you use to assume all your existing debt, it comes with multiple benefits and can be used as you wish.

Getting a Debt Consolidation Loan

Before you apply for any debt consolidation loans, start by taking an inventory of your current debt and interest rates. List out how many debts you're paying each month, and calculate the total dollar amount of debt you need to consolidate. This will help you understand how much you need to borrow to consolidate your existing loans and give you an idea of the interest rate you need in order to save money moving forward.

Next, get a copy of your credit reports and review them for accuracy. You should also understand your credit scores, because debt consolidation lenders will review your credit reports and scores when deciding whether to approve you for a loan. (Familiarize yourself with credit scoring ranges and what is considered a good score; typically, anything above 700 in the FICO® Score model is considered good.) Your scores will also help lenders determine what APR you qualify for.

If your score is in the good or excellent range, you probably have a strong chance of getting approved for a personal loan with a low APR. But if your credit is in the fair to poor range, it may be a little trickier to consolidate your debts. However, there are loans geared to people with less established credit or lower credit scores. Just keep in mind that applicants with lower credit scores are often approved for higher interest rates on their new debt, so it's important to pay attention to the rates when you apply.

Finally, shop around for a debt consolidation loan and compare terms. Your goal is to secure the lowest interest rate possible, but you should also make sure you can afford the monthly payment and pay attention to any other fees the lender may charge. You may also want to consider finding a lender that will send the money directly to your other creditors, rather than sending you a check that can tempt you into spending the cash.

What to Keep in Mind When Shopping for a Debt Consolidation Loan

Make sure you get the best loan possible when consolidating debt by following these tips:

1. Get the Best Terms Possible

Since a debt consolidation loan is supposed to save you money, it's important to make sure your new interest rate is lower than your existing rates. Review all your borrowing options before picking a debt consolidation loan, as some may offer better terms and benefits than others. In addition to your own bank, check out other banks and credit unions, as well as Experian's marketplace for a full selection of debt consolidation loans.

2. Look at the Lifetime Cost of the Loan

This calculation will help you understand how much money you can save in interest by using a debt consolidation loan.

Say you have $5,000 in credit card debt with an average APR of about 25%. Over 36 months, your monthly payment is approximately $240 and you will pay a total of $2,500 in interest. If you consolidated this debt into a new loan with an average APR of 17% over 36 months, the total amount you'd pay toward interest would drop to around $1,700 and your monthly payment would come down to $200. Over the life of this loan, you will have saved approximately $1,440 in interest.

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The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.

3. Beware of Penalties and Other Fees

Many loan products come with origination fees or prepayment penalties that could be quite steep. If you hope to pay off your loan ahead of schedule, one with a prepayment penalty is not right for you. Shopping around before selecting a loan will help you determine which one has the right terms for you.

What If Your Loan Application Gets Denied?

If you've been denied for a debt consolidation loan, here are a few options that may help:

1. Try Requesting a Lower Amount from the Lender

You may have been denied because the lender felt there was too much risk in issuing you the amount you asked for. By lowering the amount, you lower the risk, and the lender might be more open to approving you. In this case, you may still have multiple payments, but the debt consolidation loan may cover a good majority of them.

2. Consider a Debt Management Plan

With a debt management plan, or DMP, a credit counselor can help create a plan that outlines how you will repay your existing debt. Once you agree to this plan, you will pay the credit counseling organization directly and they will make your monthly payments according to the repayment plan you agreed on.

To find a reputable credit counselor, look for one that is accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America. The U.S. Department of Justice also maintains a state-by-state list of approved credit counseling agencies. For more information on how to choose a credit counselor, check out these suggestions from the Federal Trade Commission.

3. Consider an Alternative Lender

Some lenders use information other than your credit history when considering you for a new loan. Some companies consider education, employment, income and other aspects of your background when making a decision. If you have poor credit and cannot get approved by a conventional lender, you may find luck with a company like this.

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