As stated at https://loans.usnews.com, you will go through several steps to apply for and receive a debt consolidation loan. This includes applying (with prequalification), choosing your loan terms, finalizing your application with a hard inquiry and finally, repaying the loan.
- The first step of the application process is typically a preapproval. This is a soft inquiry on your credit that produces a rate quote. Most lenders have requirements including:
- The debt-to-income ratio of 50 percent or less
- At least fair or good credit, which is a FICO score of 580 to 739. For the best interest rates, a higher score is recommended.
- Clean credit history, free of bankruptcy, tax liens, repossessions or foreclosures
- Proof of identification.
Your credit history will significantly influence the interest rate quoted for your debt consolidation loan, as most lenders use risk-based pricing. With very good or excellent credit (a FICO credit score of 740 or higher), you will be in a better position to qualify for the lowest interest rate offered by a lender. With a lower credit score, you are a higher risk and will be offered a higher interest rate.
- Choose your loan terms. Your loan terms determine how much you will borrow and how long you will take to pay it back. Typical loan amounts range from $1,000 to $50,000, depending on your creditworthiness. Loan lengths are usually between two to five years. You will confirm your interest rate and any origination fees (typically 1 to 5 percent) associated with the loan.
- Finalize your application. When you finalize your application, you confirm the details of the loan and verify your identity, income, and other qualifying information. The lender will pull your credit report to verify creditworthiness, which will result in a hard inquiry on your credit.
- Get approved and close. Once approved, you will go through the closing process and disbursement of funds. Most debt consolidation loans offer wire transfers for funds, but some can pay creditors directly or send a check for bank deposit.
- After you receive funds, you will begin repaying the loan according to the terms set forth in the agreement.
Before You Apply for a Debt Consolidation Loan
However, getting a debt consolidation loan is a major financial decision and one that shouldn’t be taken lightly. Before you apply for a debt consolidation loan, you should consider alternatives, figure out how you’ll make payments and make sure you’re finding the best rate available. Here is the consideration as stated at https://loans.usnews.com.
You may pay less in interest with debt consolidation loan alternatives. Credit cards with zero percent APR on balance transfer offers to allow you to transfer existing credit card balances to that new card. For the length of the introductory period, you can make payments to reduce your balance without accruing interest. Additionally, local credit unions may have lower-interest loans.
Set up a repayment plan and budget.
It’s essential to have a plan for how you can make the new payments, especially if you’ve previously struggled to keep up with minimum payments on your balances. To avoid missed payments, penalties or default, you’ll need to create a budget that allows you to make payments on your debt consolidation loan. Assess your current debt total by listing out your debts, including credit cards, student loans, car loans, and any other accounts.
Track your spending to see where your money goes each month, identifying areas where you may be able to cut back. Compare your debt payment obligations and your spending to create a budget and determine how much you can realistically pay on your debt each month. Once you know how much you can realistically allocate to paying down your debt each month, you can use the amount to determine terms for your loan. The amount you pay on your debt consolidation loan each month will vary depending on the amount you borrow and how many years you will take to repay it.
Shop around for the best quote.
You should compare at least a few different lenders for your debt consolidation loan to ensure you’re getting the best interest rate and terms you can qualify for. Most lenders offer rate quotes, which are soft inquiries on your credit and have no effect on your credit score. When you do a hard inquiry during the final approval process, it will be reflected on your credit report. However, if you have multiple hard inquiries within a 45-day period, it’s considered rate shopping and will only count as a single credit inquiry.
Although debt consolidation loans are a legitimate solution for eliminating debt, some other debt consolidation options are scams. It’s best to stick with trusted, well-established lenders such as the ones recommended on our list. When shopping for a debt consolidation loan, you should watch out for red flags including aggressive sales representatives, guaranteed approvals and quick-fix promises, as well as requirements such as upfront payments before loan approval or access to bank accounts for automatic withdrawals. “No lender should charge you upfront before you get the loan … and you certainly shouldn’t send money with a wire transfer or prepaid card,” Detweiler cautions.
Make a plan to avoid new debt.
A debt consolidation loan can wipe the slate clean and allow you to start fresh with zero balances on credit cards and other credit commitments. Although it may be tempting, avoid using your newly cleared accounts to shop or manage household expenses. You don’t want to create new debt that you’ll have to pay on top of your debt consolidation loan.
Get a loan. While this may sound easy, it actually can be one of the hardest ways to consolidate. However, a debt consolidation loan also will be the best option for your credit in the long run. A debt consolidation loan usually will have a lower interest rate than your credit cards.
If you owe more than your current unsecured high credit rating (the highest amount you have borrowed from a lending institution without offering collateral), you probably will have to offer something up as collateral to receive a debt consolidation loan. Most likely, the bank will want something of considerable value with a title or deed that can be held until you repay your debt. People commonly refinance their homes or get second mortgages, and use the equity in their home as that collateral.
The greatest benefits of this type of debt consolidation are the ability to spread loan payments over a long period of time, and possibly to deduct the interest you pay from your taxes. Debt consolidation loans will have the least impact on your credit and possibly the lowest payments, but they also will take the longest time and save you the least amount of money of all options. There’s no reason to wait to consolidate credit card debt into a more manageable debt consolidation loan. Let DebtHelp.com help you find your debt solution.