How to get a debt consolidation loan in 6 steps

Depending on the loan terms, you could save money on interest and pay off your total debt sooner with a low-interest debt consolidation loan. It lets you roll multiple high-interest debts into a new loan, preferably with a lower interest rate than you’re currently paying.

How to qualify for a debt consolidation loan

You can get a debt consolidation loan from most banks, credit unions and online lenders. Eligibility requirements vary by institution, but there are a few steps you can take — like checking your credit, calculating your total monthly debt and comparing lenders — to increase your chances of approval.

1. Check your credit score

You’ll typically need a credit score of at least 700 to qualify for a debt consolidation loan with a competitive interest rate. However, a lower credit score doesn’t automatically equal a denial, as some lenders offer loans for bad credit. The annual percentage rate (APR) will likely be higher, so it’s important to shop for the best bad credit loans. If you can’t find a better APR, taking out a debt consolidation loan may not be worth it, as you won’t be able to save money on interest.

There are a few ways you can check your credit score. Some banks and credit issuers, like SoFi, allow you to view your score for free if you have an account with the company. You can also request a free copy of your credit report from all three credit bureaus on a weekly basis by visiting AnnualCreditReport.com. Although these reports won’t have your actual score, they will list your repayment activity, negative marks and borrowing history.

2. List out your debts and payments

Create a list of all the debt accounts you plan to consolidate — including the amount you owe, the interest rate and the minimum monthly payment. Then, total the balances to determine how big of a loan you’ll need to consolidate your debt.

After that, add up all of your minimum payment amounts to see how big a monthly payment on a debt consolidation loan you can afford. Once you have that down, use a loan calculator to see the terms and interest rates you’ll need to secure for the loan to serve its intended purpose.

3. Calculate your debt-to-income ratio

Your debt-to-income (DTI) ratio is a key determinant of your approval for a debt consolidation loan. It’s calculated by dividing the sum of all your monthly debt payments by your gross monthly income (or the amount you earn before taxes and other deductions are taken out).

To illustrate, assume you pay $350 in minimum monthly credit card payments and have an auto loan and personal loan that cost you $585 and $425 each month, respectively. If you earn $3,500 monthly, your DTI ratio would be 38 percent. Here’s the calculation:

• Total monthly debt payments: $350 + $585 + $425 = $1,360
• Gross monthly earnings: $3,500
• DTI calculation: [$1,360 (total monthly debt payments) / $3,500 (gross monthly earnings)] x 100 = 39 percent

Ideally, your DTI should not exceed 45 percent to have the best chance at qualifying for a debt consolidation loan. Some lenders may be a bit more lenient, but you may only be eligible for less favorable terms.

4. Compare lenders

When comparing debt consolidation lenders, consider the APRs, fees and any other perks they offer borrowers. Also, look for consumer feedback on platforms like the CFPB’s Consumer Complaint Database, Trustpilot and the Better Business Bureau to determine whether a lender is reputable.

Start your search for a debt consolidation loan by checking with your current bank or credit union. Compare your financial institution’s rates and terms to those offered by other top lenders. An online marketplace like Bankrate can help you compare multiple lenders at once.

5. Apply for the loan

Gather any information and documentation the lender requires before starting the full application. Although this varies by lender, you’ll typically need to provide the following:

• Proof of income: W-2s, 1099s, pay stubs or tax returns.
• Proof of identity: Birth certificate, driver’s license, state-issued ID, passport or another official ID.
• Proof of address: Utility bill, lease or rental agreement, bank or credit card statement or voter registration card.

Once you have your documents handy, submit the loan application. Many lenders allow you to apply online, receive a quick decision and upload the supporting documents to issue final approval. But if you’re applying with a traditional bank or credit union, you may be required to visit a physical branch to apply and it could take longer to receive a lending decision.

6. Close the loan and make payments

If approved, review the loan documents, get clarity on anything you don’t understand from the lender and approve the term agreements. The lender will process the file for closing and disburse the loan proceeds to your bank account directly. However, some lenders use the funds to pay your creditors directly, if you sign up for it.

Alternatives to debt consolidation loans

After exploring your options, you may find that a debt consolidation loan isn’t an ideal solution for you. Whether it’s because you don’t qualify for a loan with attractive terms or you need to access a larger amount, there are alternatives to debt consolidation worth considering, including the following:

• Recalibrate your budget: Spot opportunities to free up cash flow and use it toward debt repayment. Some ideas include cutting down on subscription services or switching to a cheaper internet or cell phone plan.
• Use a balance transfer credit card: If you qualify for a balance transfer card with a 0 percent introductory rate, you could move several credit card balances into that account to pay them off faster while saving on interest.
• Home equity loan: If you’re a homeowner, you can borrow against the equity you have in your property, often at a lower rate than you’d pay on a debt consolidation loan. However, a major disadvantage of a home equity loan is that if you default, the lender can foreclose on your home.
• Seek third-party help: If you have a significant amount of debt — $10,000 or more — consider seeking help from a credit counseling agency or debt relief company. Either could help you consolidate your debt and negotiate with your creditors to get you more favorable terms, though you may find a nonprofit credit counselor to be more cost effective than even the best debt relief company.
• Savings: Tapping your savings to pay more than the minimum monthly payment on your debt can also help you get out of debt faster and save money on interest charges. That said, try not to exhaust your emergency savings because it could lead to taking on more debt to cover a true future emergency.

Whether you choose a debt consolidation loan, a balance transfer credit card or another alternative, you must avoid taking on more debt while paying off your balances for your situation to improve. To do this, you should evaluate what got you in debt. Look into establishing better spending and savings habits, and be firm about your budget.

Bottom line

If you’re considering a debt consolidation loan to get out of debt sooner and save money, familiarize yourself with the lending process so you’ll know what to expect. Doing so also educates you on the necessary steps you can take to boost your approval odds.

At the end of the day, if you don’t qualify or are unsure about taking on another loan, consider all of your options. Otherwise, you could end up with a larger debt load and another monthly payment that tightens your budget even more.