Consolidate your debt in 5 steps


So you’ve decided that consolidation is your best bet for getting your debt under control. Consolidating through a personal loan could allow you to pay off high interest debt, simplify your payments, and reduce your debt faster.

Here are five steps to get 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 FICO,
scale) may not disqualify you from all loans, but consumers with a good to excellent credit rating (690-850 FICO) are more likely to get approved 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 where you can get a lower rate, take the time to strengthen it. Here’s how:

  • Catch up on late payments. Late payments are reported to the credit bureaus after 30 days of late payment and can reduce your credit score by 100 points or more. If you are within the 30 day window, there is still time to submit your payments.
  • Check for errors. Errors on your credit report, such as bad debt payments or accounts incorrectly marked as closed, could hurt your score. Check your free credit reports once a year at, and if you find any errors, dispute the errors.
  • Pay off small debts. Debts owed represent 30% of your credit score. See if you can pay off the high interest credit cards before you consolidate. It also improves your debt to income ratio, which can 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 can include credit cards, store cards, payday loans, and other high rate debt. You will want the proceeds of your loan to cover the sum of your debts.

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

3. Compare loan options

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

  • Online lenders cater to borrowers with all ranges of credit, although loans can be expensive for those with bad credit. Most allow you to pre-qualify so you can compare personalized rates and terms without impacting your credit score.

  • Bank loans work best for those with good credit, and customers with an existing banking relationship may qualify for a rate reduction.

  • Credit unions are non-profit organizations that can 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 significant effort with your application, which can temporarily affect your credit score.

Look for lenders who offer direct payment to creditors, which simplifies the consolidation process. After the loan closes, the lender sends the proceeds of your loan to your creditors at no additional 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 income verification.

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

See also: 7 Ways to Handle a Debt Collection Litigation

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 would not qualify for on your own.

5. Close the loan and make the payments

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

If the lender offers direct payment, they will pay your loan proceeds to your creditors, paying off your old debts. Check your accounts for a zero balance or call each creditor to make sure the accounts are paid off.

Read more: Kevin O’Leary Says You Must Have All Your Debt Paid By Age 45 Including Your Mortgage

If the lender does not pay your creditors, you will pay off each debt with the money deposited in your bank account. Do this right away to avoid additional interest on your old debt and to eliminate the temptation to spend the loan money on something else.

Finally, within about 30 days, make your first payment on your new consolidation loan.

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