Financial Fitness


5 steps to debt consolidation

Posted at 4:11 PM, Jun 06, 2019

So you’ve decided that consolidation is your best bet for getting a handle on your debt. Consolidating via a personal loan could mean you’ll pay off high-interest debts, simplify your payments and reduce your debt more quickly.

Here are five steps for getting a personal loan for debt consolidation , from checking your credit to closing the loan.

1. Check your credit

A bad credit score (300 to 629 on the FICO scale) may not disqualify you for all loans, but consumers with good to excellent credit scores (690 to 850 FICO) are more likely to win approval and get a low interest rate.

Ideally, the new consolidation loan would have a lower rate than the combined interest rate on your current debts. A lower rate reduces the overall cost of your debt and shortens the repayment period.

If your credit score isn’t at a level to get you a lower rate, take some time to strengthen it. Here’s how:

  • Catch up on late payments. Late payments are reported to credit bureaus at 30 days past due and can shave 100 or more points from your credit score. If you’re within the 30-day window, there’s still time to submit your payments.
  • Check for errors. Errors on your credit report, such as payments applied to the wrong debts or accounts incorrectly marked as closed, could be hurting your score. Check your credit reports for free once a year at, and if you find mistakes, dispute the errors.
  • Repay small debts. Debts owed accounts for 30% of your credit score. See if you can pay down any high-interest credit cards before you consolidate. This also improves your debt-to-income ratio, which may help you get a lower rate on the consolidation loan.

2. List your debts and payments

Now make a list of the debts you want to consolidate. This may include credit cards, store cards, payday loans and other high-rate debts. You’ll want your loan proceeds to cover the sum of your debts.

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

3. Compare loan options

It’s time to start shopping for a loan . Online lenders, credit unions and banks all provide personal loans for debt consolidation.

  • Online lenders cater to borrowers with all ranges of credit, although loans can be costly for those with bad credit. Most let you pre-qualify so you can compare personalized rates and terms, with no impact to your credit score.
  • Bank loans work best for those with good credit, and customers with an existing banking relationship may qualify for a rate discount.
  • Credit unions are nonprofit organizations that may offer lower rates to borrowers with bad credit. You must become a member to apply for a loan, and many credit union loans require a hard pull with your application, which can temporarily hurt your credit score.

Shop 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.

Other features to consider include: payments reported to credit bureaus (on-time payments can help your credit score); flexible payment options; and financial education and support.

4. Apply for a loan

Lenders will ask for several documents to complete the loan process, including proof of identity, proof of address and verification of income.

Make sure you read and understand the fine print of the loan before signing, including extra fees, prepayment penalties and whether payments are reported to credit bureaus.

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

5. Close the loan and make payments

Once you’ve been approved for a loan, the process is almost complete.

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 does not 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, make your first payment toward your new consolidation loan.

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