How to get a debt consolidation loan: What you need to know

When you make a conscious decision to strategically get rid of your debt, you have choices. One strategy to consider is debt consolidation. 

A debt consolidation loan combines unsecured debts, such as credit cards, medical bills, and other balances with no collateral behind them into a single loan with one monthly payment. It doesn’t reduce what you owe. What it can change is your interest rate and how many payments you track each month. Lenders base approval and your interest rate mainly on your credit history and income. 

Here’s how to get a debt consolidation loan if you decide that getting one makes sense for your situation. 

How to get a debt consolidation loan, step by step

1. Check your credit

Your credit history helps determine whether a lender approves your application and the interest rate you receive. 

Start with checking your credit score. Your bank, credit union, or credit card issuer might provide it free to customers, and free score tools are widely available elsewhere. If a page requests a credit card number, you’ve reached a paid product. Back out and try to find another source.

Next, check your credit reports for errors. AnnualCreditReport.com is the only federally authorized site for free reports, and you can get one from each of the three credit bureaus there. An incorrectly reported late or missing payment could drag your score down, and disputing it costs nothing.

2. List your debts

Record each debt with the creditor name, balance, minimum payment, and interest rate. Order them from highest interest rate to lowest.

Your balances tell you how much to borrow. Your rates tell you which debts could be worth consolidating. A debt payoff calculator gives you a way to run the numbers before you contact a lender.

3. Compare your loan options

A debt consolidation loan could come in the form of a personal loan, or you could borrow against your home equity to consolidate debt.

A personal loan is unsecured, so it’s not tied to an asset like a home. Repayment terms typically span a few years, and interest rates are fixed so you have one predictable monthly payment. 

A home equity loan or home equity line of credit (HELOC) uses your home as collateral. Lower lender risk could mean a lower rate for you. Terms typically run much longer than personal loans, so your monthly payment could drop while the total interest you pay could climb. Your home secures the loan, and missed payments could put your home at risk.

As you compare options, ask every lender:

• What is the APR, including all fees?

• Is there an origination fee, and can I pay it up front instead of rolling it into the loan?

• Does the loan carry a prepayment penalty?

• Will you pay my creditors directly, or send the funds to me?

4. Prequalify, then apply

Most lenders let you prequalify for a debt consolidation loan. Prequalification estimates your loan amount and interest rate through a soft credit check, which doesn’t affect your credit score. A full application triggers a hard inquiry, which could slightly lower it. 

Compare offers by APR rather than interest rate. APR includes the fees, so the lowest rate doesn’t always cost the least.

Find out if you qualify for a personal loan through Achieve.

Requirements for a debt consolidation loan

Lenders evaluate four things:

• Credit history. Payment history carries the most weight. Credit utilization ranks second, followed by how long you've held credit and how recently you've applied for more.

• Income. Lenders want income they can verify. Self-employment, commission, and bonus pay all count, though each typically requires more documentation than a regular salary.

• Debt-to-income ratio. Your debt-to-income (DTI) ratio measures the share of your gross monthly income that goes toward debt payments. A lower ratio leaves more room for a new payment. Estimate yours with a debt-to-income ratio calculator.

• Loan purpose. Most people who consolidate credit card debt name that purpose directly on the application.

Gather recent pay stubs, bank statements, and a government ID before you apply. Self-employed applicants should add tax returns.

Lenders weigh these factors differently, so a declined application for one loan doesn’t automatically transfer to another application. 

So, should you get a debt consolidation loan? That depends on whether the new rate beats what your current balances charge. Prequalifying with two or three lenders gives you the real numbers.

How to get a debt consolidation loan with bad credit

Weak credit narrows your options. It doesn’t close them.

A lower credit score usually leads to a consolidation loan with a higher rate, a smaller loan amount, or both. Knowing that up front helps you judge an offer clearly.

Four moves could improve your odds:

• Consider a secured option. A loan backed by home equity carries less risk for the lender, which could lower your rate. It also means if you stop paying your loan, you could lose your home.

• Add a co-applicant. A co-signer or co-borrower both become legally responsible for repaying the debt. A co-signer or co-borrower with strong credit could help improve your odds. 

• Borrow less. Consolidate only your highest-rate balances to bring the loan amount down.

• Correct credit report errors. A mistake on your credit report could make it harder to qualify for a debt consolidation loan. Disputing it could raise your credit score, potentially making it easier to get approved. 

Achieve is not a credit repair organization and does not provide or offer services or advice to repair, modify, or improve your credit.

How hard is it to get a debt consolidation loan?

Three factors determine how difficult it is to get a debt consolidation loan: your credit, your income, and the amount of debt you want to consolidate. An applicant with a modest balance, strong credit, and steady income could find several offers. An applicant consolidating a large balance on thin credit might find fewer. Prequalification tells you where you fall without a hard inquiry on your credit report. 

Where to get a debt consolidation loan

Banks, credit unions, and online lenders all offer consolidation loans. Credit unions sometimes work with members whose credit is still recovering, though you must meet membership requirements first. Some online lenders advertise a prequalification decision in minutes. 

It might help to prequalify with more than one lender. Offers vary and comparing them costs nothing.

What to expect after you apply, and if you’re denied

The amount of time it takes to fund a debt consolidation loan can vary by lender and loan type. Personal loans generally move faster because there’s no property evaluation involved.

Home equity loans typically take longer. The lender needs to assess your property value, your county records the loan, and title and escrow services add more time. Federal law then gives you three business days to cancel a loan secured by a home you live in. 

Once the money arrives, some lenders pay your creditors directly, and others send the funds to you. Either way, keep making your scheduled payments until each account shows a zero balance, and verify it rather than assume it. 

Also note that those paid-off accounts usually stay open. If you charge them back up, you’ll carry a consolidation loan and new card balances at once.

If a lender denies your application, consider three paths.

• Snowball or avalanche payoff. Pay the minimum on everything, then direct every extra dollar at one debt. The snowball targets your smallest balance first. The avalanche targets your highest rate. Both repay your balances in full. The Achieve GOOD app can help you track your progress.

• A debt management plan. Nonprofit credit counselors build these. You make one monthly payment, the agency distributes it, and you repay the full balance, sometimes at a reduced interest rate.

• Debt settlement. Debt settlement means negotiating with creditors to accept less than the full balance owed. It is not a loan. You can seek debt relief this way on your own or through a company. Results depend on creditor cooperation and your individual circumstances.