When borrowers accrue debt from multiple lenders, it can be difficult to track payments. Even if they have bad credit, debt consolidation loans are a way for borrowers to centralize what they owe by combining their debts into a single loan with a fixed payment plan. Read on to learn how to apply for a debt consolidation loan and compare offers.
1. Know Your Credit Score
A borrower’s first step as to how to get approved for a debt consolidation loan is to find out where their credit score stands. This may determine what kind of rates, terms, and amounts they’re eligible for or even which lenders will work with them.
A good credit score is considered a FICO score of 670 and above while a bad score is 579 or below. Many lenders may see bad credit scores as a sign that the individual would be a much greater risk to lend to than someone with a good credit score and, thus, may not approve them.
Consumers can check if they qualify with a lender without damaging their credit score if the lender offers soft credit checks. This allows consumers to prequalify for a loan without hurting their credit score. A hard check, on the other hand, could temporarily put a dent in a borrower’s score.
However, as frustrating as a bad credit score can be, it’s not the end of the world for many. In fact, there are plenty of ways consumers can improve their scores. If an individual has a credit score that could use some polishing, you can try to improve it by learning our tips for working on bad credit.
To check their credit score for free without hurting their credit, consumers can visit AnnualCreditReport.com.
2. Calculate your Sum Total Debt and Payments
To start calculating how much they may need for a debt consolidation loan, consumers can gather information on their current debts such as the amount still owed, interest rates, and the minimum monthly payment amount. Add together the total amount that is owed as well as the monthly repayments, then calculate the average interest rate across all the debts. Consumers can leave out secured debts and student loans.
Once the information is pulled together, consumers can compare those numbers to the interest rates, monthly payment amounts, and terms offered by lenders. This way, consumers can see which lender offerings may save them the most amount of money in the long run and find out how much funding they’ll need to cover their debts.
A common use for debt consolidation loans is to put it toward credit card debt. This is because credit cards often come with high interest and it can take months, even years, to pay it off. In the meantime, those credit cards are accruing interest. A debt consolidation loan can provide a light at the end of the tunnel with a clear repayment plan and potentially lower interest rates.
3. Research Loan Options
The steps for applying for a debt consolidation loan also include lots of research. It’s important to thoroughly review debt consolidation loan providers whether that’s a bank, credit union, or online lender. While banks are best for those with good credit, credit unions and online lenders tend to be more willing to work with those whose credit is poor.
While researching, consumers can note whether lenders report payments to credit bureaus and, if they do, which ones. Consistent, on-time payments could potentially increase credit scores so it’s important that your lender reports these. Consumers may also want to keep an eye out for lenders that simplify the process as this could be indicative of what it’s like to work with them.
If a consumer has a poor credit profile, they can look into consolidating debt with a bad credit score as some lenders are willing to work with credit scores that are less than perfect.
4. Figure out a Payment Plan
Before agreeing to a loan, consumers may want to create a financial budget to determine how much they can afford in monthly repayments. This way, potential borrowers can set themselves up to be prepared for this new loan plan and avoid missing payments. Consumers can plan ahead and avoid the same pitfalls that may have landed them in the position of needing a debt consolidation loan in the first place.
Within that budget, consumers can list out their projected monthly income as well as expenses. Consumers may also want to account for any unexpected expenses and provide themselves some financial cushion in case of any surprises down the road. A budget can give them an overview of how much they can afford in minimum monthly payments and even if they can afford to make extra payments. Consumers can compare this amount to how much they’re paying with their current debts.
5. Apply and Compare Lenders for the Best Rates
To find the right offer, consumers can apply to multiple lenders. If a lender offers a soft credit check, the consumer can check what the lender is willing to offer them without hurting their credit. When comparing quotes, consumers should pay particular attention to interest rates, loan terms, amounts, origination fees, and minimum monthly payments. Other considerations may be how quickly loans are funded and any other fees or penalties. While researching lenders, consumers may also want to continue educating themselves on debt consolidation principles to avoid any surprises down the road and decide if this type of loan is best for them.
6. Read the Fine Print
Some find that reading the fine print on an offer is among the most important steps for getting approved for a debt consolidation loan. The last thing a consumer may want is to face unexpected fees, penalties, or terms they weren’t aware of before they signed.
In particular, consumers may want to look over the fine print for the final APR rate, origination fees, late fees, and prepayment penalties. Another detail worth noting is whether the lender is willing to lower your interest rate if you sign up for automatic payments.
Find out whether your lender reports payments to the three credit bureaus—Equifax, Experian, and TransUnion. If they do report payments, consumers can find out to which bureaus if not all three. If a lender does not report payments, that may be a red flag. This can be an important factor to check on as on-time payments can lead to an increase in credit scores.
7. Accept the Loan and Start Repayment
Once a borrower has accepted the loan, they’ll need to start making repayments to their new lender. However, first, they need to make sure that their original creditors are paid off. While some lenders will directly pay the original creditors, some will fund the borrower the money and leave them to pay the original lenders. In this case, it’s important for borrowers to pay that debt off immediately. If the new lender is responsible for directly paying off the original creditors, the borrower may want to check with both the new and old lenders to verify that this is done.
Once the borrower starts making payments, they’ll want to keep up with the minimum monthly amount required. However, borrowers can save money in the long run by putting down extra payments on the debt consolidation loan. The longer the loan is dragged out, the lower the minimum payments but the higher the interest rate, and vice versa.